-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FOqn+l79aYPt6B1NBfzy6nlpGK1HxJMWR/Z9txa0YbijIveII5gCCVPDP/Q0lQls UDuMcooYbi/44oDFFYVLrw== 0000950116-96-001110.txt : 19961018 0000950116-96-001110.hdr.sgml : 19961018 ACCESSION NUMBER: 0000950116-96-001110 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 24 FILED AS OF DATE: 19961017 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCO GROUP INC CENTRAL INDEX KEY: 0001022608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] STATE OF INCORPORATION: PA FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-11745 FILM NUMBER: 96644935 BUSINESS ADDRESS: STREET 1: 1740 WALTON ROAD CITY: BLUE BELL STATE: PA ZIP: 19422-0987 BUSINESS PHONE: 6108321440 S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1996 REGISTRATION NO. 333-11745 ============================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NCO GROUP, INC. (Exact name of Registrant as specified in its charter) Pennsylvania 7322 23-2858652 - --------------------------------------------------------------------------------------------------- (State or other jurisdiction (Primary standard industrial (I.R.S. employer of incorporation or organization) classification code number) identification number)
1740 Walton Road Blue Bell, Pennsylvania 19422-0987 Telephone (610) 832-1440 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Michael J. Barrist, President and Chief Executive Officer NCO Group, Inc. 1740 Walton Road Blue Bell, Pennsylvania 19422-0987 Telephone (610) 832-1440 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Francis E. Dehel, Esquire Henry D. Kahn, Esquire Blank Rome Comisky & McCauley Lawrence R. Seidman, Esquire 1200 Four Penn Center Plaza Piper & Marbury L.L.P. Philadelphia, Pennsylvania 19103 36 South Charles Street Telephone: (215) 569-5500 Baltimore, Maryland 21201 Telephone: (410) 539-2530 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ============================================================================= Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. SUBJECT TO COMPLETION, DATED OCTOBER 18, 1996 2,500,000 SHARES [LOGO] COMMON STOCK All of the shares of Common Stock offered hereby are being sold by NCO Group, Inc. ("NCO" or the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "NCOG." See "Risk Factors" commencing on page 8 of this Prospectus for a discussion of certain factors that should be considered by prospective purchasers of the Common Stock offered hereby. ------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =============================================================================== Price to Underwriting Proceeds to Public Discount (1) Company (2) - ------------------------------------------------------------------------------- Per Share ........ $ $ $ Total (3) ........ $ $ $ =============================================================================== (1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting offering expenses payable by the Company, estimated at $1,150,000. (3) The principal shareholders of the Company (the "Selling Shareholders") have granted to the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ , and $ , respectively. See "Principal and Selling Shareholders" and "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any orders in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the office of Montgomery Securities on or about , 1996. ------ MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. , 1996 Six pictures depicting the Company's call center in Blue Bell, Pennsylvania, the Company's call center in Buffalo, New York and the Company's computer center in Blue Bell, Pennsylvania and an NCO telephone representative appear here. A diagram depicting the accounts receivable recovery process also appears here. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. The Company is a recently formed Pennsylvania corporation. On September 3, 1996, the shareholders of NCO Financial Systems, Inc. ("NCO Financial") exchanged each of their shares of NCO Financial for one share of the Company, NCO Financial became a wholly-owned subsidiary of the Company and NCO Financial's status as an S Corporation was terminated. See "Dividend Policy and Prior S Corporation Status." Unless the context otherwise requires, all references in this Prospectus to the "Company" or "NCO" mean NCO Group, Inc. and its subsidiaries. Unless otherwise indicated, all information in this Prospectus: (i) assumes no exercise of the Underwriters' over-allotment option; (ii) gives effect to a proposed 46.56-for-one stock split effected in September 1996; and (iii) gives effect to the Company's acquisition of Management Adjustment Bureau, Inc. ("MAB") on September 5, 1996. THE COMPANY NCO is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company develops and implements customized accounts receivable management solutions for clients. From eight call centers located in six states, the Company employs advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through efficient utilization of technology and intensive management of human resources, the Company has achieved rapid growth in recent years. Since April 1994, the Company has made four acquisitions which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including telemarketing, customer service call centers and other outsourced administrative services. The Company believes that it is among the 20 largest accounts receivable management companies in the United States. The Company provides its services principally to educational organizations, financial institutions, healthcare organizations, telecommunications companies, utilities and government entities. In 1995, the Company had over 5,000 clients, including Bell Atlantic Corporation, First Union Corporation, George Washington University Hospital, NationsBank and the University of Pennsylvania. For its accounts receivable management services, the Company generates substantially all of its revenue on a contingency fee basis. The Company seeks to be a low cost provider and as such its fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients, with a current average of approximately 24%. According to the 1995 Top Collection Markets Survey published by the American Collectors Association, Inc. ("ACA"), an industry trade group, the average fees realized by the accounts receivable management companies surveyed were in the range of 30% to 43% depending upon the industries served. For many of its other outsourced teleservices, the Company is paid on a fixed fee basis. While NCO's contracts are relatively short-term, the Company seeks to develop long-term relationships with its clients and works closely with them to provide quality, customized solutions. Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many corporations are recognizing the advantages of outsourcing accounts receivable management and other teleservices as a result of numerous factors including: (i) the increasing complexity of such functions; (ii) changing regulations and increased competition in certain industries; and (iii) the development of sophisticated call management systems requiring substantial capital investment, technical capabilities and human resource commitments. Consequently, receivables referred to third parties for management and recovery in the United States have grown substantially from approximately $43.7 billion in 1990 to approximately $79.0 billion in 1994, according to estimates published by the ACA. While significant economies of scale exist for large accounts receivable management companies, the industry remains highly fragmented. Based on information obtained from the ACA, there are currently approximately 6,300 accounts receivable management companies in operation, the majority of which are small, local businesses. Given the financial and competitive constraints facing these small companies and the limited number of liquidity options for the owners of such businesses, the Company believes that the industry will experience consolidation in the future. See "Business -- Industry Background." 3 The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other related teleservices to companies with substantial outsourcing needs. The Company's business strategy encompasses a number of key elements which management believes are necessary to ensure quality service and to achieve consistently strong financial performance. First, the Company focuses on the efficient utilization of its technology and infrastructure to constantly improve productivity. The Company's teleservices infrastructure enables it to perform large scale accounts receivable management programs cost effectively and to rapidly and efficiently integrate the Company's acquisitions. A second critical component is NCO's commitment to client service. Management believes that the Company's emphasis on designing and implementing customized accounts receivable management programs for its clients provides it with a significant competitive advantage. Third, the Company seeks to be a low cost provider of accounts receivable management services by centralizing all administrative functions and minimizing overhead at all branch locations. Lastly, the Company is targeting larger clients which offer significant cross-selling opportunities and have greater teleservices outsourcing requirements. See "Business -- Business Strategy." The Company seeks to continue its rapid expansion through both internal and external growth. The Company intends to continue to take advantage of the fragmented nature of the accounts receivable management industry by making strategic acquisitions. Through selected acquisitions, the Company will seek to serve new geographic markets, expand its presence in its existing markets or add complementary services. In addition, the Company has experienced and expects to continue to experience strong internal growth by continually striving to increase its market share, expand its industry-specific market expertise and develop and offer new value-added teleservices. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however, as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. See "Acquisition History." The Company's principal executive offices are located at 1740 Walton Road, Blue Bell, Pennsylvania 19422, and its telephone number is (610) 832-1440. SUMMARY OF RECENT OPERATING RESULTS The Company's revenue for the nine months ended September 30, 1996 was $20.3 million on an actual basis and $29.4 million on a pro forma basis, compared to revenue for the nine months ended September 30, 1995 of $9.0 million. For the nine months ended September 30, 1996, operating income was $3.3 million on an actual basis and $3.9 million on a pro forma basis, compared to operating income of $1.2 million for the nine months ended September 30, 1995. The increase in actual revenue and operating income was attributable to internal growth and the acquisition of Eastern Business Services, Inc. ("Eastern") in August 1995, the Trans Union Corporation Collections Division ("TCD") in January 1996 and MAB in September 1996. Such operating information is preliminary and subject to further review and possible revision by the Company. The preliminary results for the nine months ended September 30, 1996 are not necessarily indicative of the results to be expected for the full year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations" and "Pro Forma Consolidated Financial Statements." 4 THE OFFERING Common Stock offered by the Company ................ 2,500,000 shares Common Stock to be outstanding after the Offering .. 6,713,447 shares (1) Use of proceeds .................................... For repayment of bank debt incurred to finance acquisitions, for payment of S Corporation distributions, and for working capital and other general corporate purposes, including possible acquisitions. Proposed Nasdaq National Market symbol ............. NCOG
- ------ (1) Excludes: (i) 464,390 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 240,591 shares of Common Stock reserved for issuance upon the exercise of warrants granted or to be granted by the Company to its lender; and (iii) 83,333 shares of Common Stock reserved for issuance upon the conversion of the Company's $1.0 million Convertible Note (at an assumed conversion price of $12.00 per share) issued as partial consideration for the MAB acquisition. See "Acquisition History," "Management-- Stock Option Plans" and "Description of Capital Stock -- Warrants and Convertible Note." 5 SUMMARY FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, -------------------------------------------------- 1991 1992 1993 1994 ---------- ---------- ---------- ---------- Statement of Income Data: Revenue ............... $ 3,792 $ 5,822 $ 7,445 $ 8,578 Operating costs and expenses: Payroll and related expenses ......... 1,892 3,058 4,123 4,558 Selling, general and administrative expenses ......... 1,457 2,013 2,391 2,674 Depreciation and amortization expense .......... 40 95 141 215 ---------- ---------- ---------- ---------- Income from operations 403 656 790 1,131 Other income (expense) (1) 15 11 (45) ---------- ---------- ---------- ---------- Income before income taxes .............. 402 671 801 1,086 Pro forma provision for income taxes (4) ... 160 268 320 434 ---------- ---------- ---------- ---------- Pro forma net income (4) ................ $ 242 $ 403 $ 481 $ 652 ========== ========== ========== ========== Pro forma net income per share .......... Pro forma weighted average shares outstanding ........ Operating Data: Total value of accounts referred ........... $178,529 $150,707 $199,108 $281,387 Average fee ........... 14.4% 16.9% 20.2% 22.5%
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Six Months Ended June 30, ------------------------------------------- 1995 1995 1996 ------------------------------ ---------- ----------------------------- Pro Pro Actual Forma(1)(2) Actual Forma(2)(3) -------------- ------------ ---------- -------------- ----------- Statement of Income Data: Revenue ............... $12,733 $34,509 $5,546 $12,543 $19,319 Operating costs and expenses: Payroll and related expenses ......... 6,797 16,412 2,956 5,954 9,479 Selling, general and administrative expenses ......... 4,042 12,531 1,745 4,095 6,516 Depreciation and amortization expense .......... 348 1,529 116 423 833 -------------- ------------ ---------- -------------- ----------- Income from operations 1,546 4,037 729 2,071 2,491 Other income (expense) (180) (212) (73) (310) (19) -------------- ------------ ---------- -------------- ----------- Income before income taxes .............. 1,366 3,825 656 1,761 2,472 Pro forma provision for income taxes (4) ... 546 1,659 262 704 1,053 -------------- ------------ ---------- -------------- ----------- Pro forma net income (4) ................ $ 820 $2,166 $ 394 $ 1,057 $1,419 ============== ============ ========== ============== =========== Pro forma net income per share .......... $ 0.17(5) $0.35 $ 0.22(5) $ 0.23 ============== ============ ============== =========== Pro forma weighted average shares outstanding ........ 4,745,229(5) 6,211,179 4,750,259(5) 6,216,209 ============== ============ ============== =========== Operating Data: Total value of accounts referred ........... $431,927 $1,134,000 $180,783 $373,499 $664,905 Average fee ........... 22.4% N/A 21.7% 24.0% 24.3%
December 31, June 30, 1996 ----------------------------------------------------- ---------------------------- Pro Forma 1991 1992 1993 1994 1995 Actual As Adjusted(6) -------- -------- -------- -------- -------- ---------- -------------- Balance Sheet Data: Cash and cash equivalents ....... $ 355 $ 421 $ 562 $ 526 $ 805 $ 990 $ 9,515 Working capital ................. 179 362 445 473 812 2,458 11,600 Total assets .................... 1,546 2,177 2,449 4,106 7,873 14,655 35,263 Long-term debt, net of current portion......................... 108 144 59 732 2,593 7,356 1,710 Shareholders' equity ............ 403 686 876 1,423 2,051 3,151 26,982
6 (1) Assumes that the acquisitions of MAB, TCD and Eastern occurred on January 1, 1995. (2) Gives effect to: (i) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (ii) the elimination of interest expense associated with acquisition related debt assumed to be repaid with offering proceeds; and (iii) the issuance of 1,715,950 shares of Common Stock (at an assumed initial public offering price of $12.00 per share) which, net of estimated underwriting commissions and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $15.0 million and to fund the distribution of undistributed S Corporation earnings (estimated at $3.0 million) through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. See Pro Forma Consolidated Financial Statements. (3) Assumes that the acquisition of MAB occurred on January 1, 1995. (4) Prior to September 3, 1996, the Company operated as an S Corporation for income tax purposes and accordingly was not subject to federal or state income taxes. Accordingly, the historical financial statements do not include a provision for federal and state income taxes for such periods. Pro forma net income has been computed as if the Company had been fully subject to federal and state income taxes for all periods presented. See Note 12 of Notes to Pro Forma Consolidated Financial Statements. (5) Assumes that the Company issued 250,000 shares of Common Stock (at an assumed initial public offering price of $12.00 per share) to fund the distribution of undistributed S Corporation earnings (estimated at $3.0 million) through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. (6) Gives effect to: (i) the MAB acquisition and (ii) the sale of the 2,500,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $12.00 per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds." 7 RISK FACTORS Certain statements included in this Prospectus, including, without limitation, statements regarding the anticipated growth in the amount of accounts receivable placed for third-party management, the continuation of trends favoring outsourcing of other administrative functions, the Company's objective to grow through strategic acquisitions and its ability to realize operating efficiencies upon the completion of the MAB acquisition and other acquisitions that may occur in the future, the Company's ability to expand its service offerings, and trends in the Company's future operating performance, are forward-looking statements, and the factors discussed below could cause actual results and developments to be materially different from those expressed in or implied by such statements. Accordingly, in addition to the other information contained in "Acquisition History -- Financial Impact of Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. RISKS ASSOCIATED WITH TCD AND MAB ACQUISITIONS The TCD and MAB acquisitions were consummated in January 1996 and September 1996, respectively. These entities had revenues of $7.5 million and $13.0 million, respectively, in 1995 compared to the Company's revenue of $12.7 million in 1995. The Company's efforts in integrating the TCD acquisition are continuing and its efforts in integrating the MAB acquisition are in the initial stages. Such integration will likely place significant demands on the Company's management and infrastructure. There can be no assurance that TCD's or MAB's businesses will be successfully integrated with that of the Company, that the Company will be able to realize operating efficiencies or eliminate redundant costs or that their businesses will be operated profitably. Further, there can be no assurance that clients of the acquired businesses will continue to do business with the Company or that the Company will be able to retain key employees. Approximately $15.0 million of the proceeds of this Offering will be used to repay indebtedness incurred in the MAB, TCD, Eastern and B. Richard Miller, Inc. ("BRM"), acquisitions. See "Use of Proceeds." RISKS ASSOCIATED WITH RAPID GROWTH The Company has experienced rapid growth over the past several years which has placed significant demands on its administrative, operational and financial resources. The Company seeks to continue such rapid growth which could place additional demands on its resources. Future internal growth will depend on a number of factors, including the effective and timely initiation and development of client relationships, the Company's ability to maintain the quality of services it provides to its clients and the recruitment, motivation and retention of qualified personnel. Sustaining growth will also require the implementation of enhancements to its operational and financial systems and will require additional management, operational and financial resources. There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth, and any failure to do so could have a materially adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." RISKS ASSOCIATED WITH FUTURE ACQUISITIONS A primary element of the Company's growth strategy is to pursue strategic acquisitions that expand or complement the Company's business. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however, as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. There can be no assurance that the Company will be able to identify additional acquisition candidates on terms favorable to the Company or in a timely manner, enter into acceptable agreements or close any such transactions. There can be no assurance that the Company will be able to achieve its acquisition strategy, and any failure to do so could have a materially adverse effect on the Company's business, financial condition, results of operations and ability to sustain growth. In addition, the Company believes that it will compete for attractive acquisition candidates with other larger companies, consoli- 8 dators or investors in the accounts receivable management industry. Increased competition for such acquisition candidates could have the effect of increasing the cost to the Company of pursuing this growth strategy or could reduce the number of attractive candidates to be acquired. Future acquisitions could divert management's attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, there is no assurance that the Company will successfully integrate future acquisitions into its business or operate such acquisitions profitably. Acquisitions may also involve a number of special risks including: adverse short-term effects on the Company's operating results; dependence on retaining key personnel; amortization of acquired intangible assets and risks associated with unanticipated problems, liabilities or contingencies. See "Business -- Growth Strategy." The Company may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to the Company, if at all. To the extent the Company uses its capital stock for all or a portion of the consideration to be paid for future acquisitions, dilution may be experienced by existing shareholders, including the purchasers of Common Stock in this Offering. In the event that the Company's capital stock does not maintain sufficient value or potential acquisition candidates are unwilling to accept the Company's capital stock as consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition program. If the Company does not have sufficient cash resources or is not able to use its capital stock as consideration for acquisitions, its growth through acquisitions could be limited. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced and expects to continue to experience quarterly variations in revenues and net income as a result of many factors, including the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, costs to support growth by acquisition or otherwise, the costs and timing of completion of additional acquisitions, the effect of the change of business mix on margins and the timing of additional selling, general and administrative expenses to support new business. The Company's planned operating expenditures are based on revenue forecasts, and if revenues are below expectations in any given quarter, operating results would likely be materially adversely affected. While the effects of seasonality on the Company's business historically have been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarters of the year due to the summer and holiday seasons. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY PERSONNEL The Company is highly dependent upon the continued services and experience of its senior management team, including Michael J. Barrist, President and Chief Executive Officer. The loss of the services of Mr. Barrist or other members of its senior management could have a materially adverse effect on the Company. The Company has five-year employment contracts with Mr. Barrist and certain other key executives. In addition, the Company has a $4.0 million key person life insurance policy on Mr. Barrist. See "Management." DEPENDENCE ON CERTAIN INDUSTRIES; CONTRACT RISKS Most of the Company's revenues are derived from clients in the education, financial services, healthcare, telecommunications and utilities industries. A significant downturn in any of these industries or any trends to reduce or eliminate the use of third-party accounts receivable management services could have a materially adverse impact on the Company's business, results of operations and financial condition. The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. Accordingly, there can be no assurance that existing clients will continue to use the Company's services at historical levels, if at all. Under the terms of these contracts, clients are not required to place accounts with the Company but do so on a discretionary basis. In addition, substantially all of the Company's contracts are on a contingent fee basis where the Company recognizes revenues only as accounts are recovered. See "Business." 9 COMPETITION The accounts receivable management industry is highly competitive. The Company competes with approximately 6,300 providers, including large national corporations such as First Data Corporation, Payco American Corporation, CRW Financial, Inc. and Union Corporation, and many regional and local firms. Some of the Company's competitors have substantially greater resources, offer more diversified services and operate in broader geographic areas than the Company. In addition, the accounts receivable management services offered by the Company are performed in-house by many businesses. Moreover, many larger clients retain multiple accounts receivable management providers which exposes the Company to continuous competition in order to remain a preferred vendor. There can be no assurance that outsourcing of the accounts receivable management function will continue or that the Company's clients which currently outsource such services will not bring them in-house. The Company also competes with other firms, such as SITEL Corporation, APAC Teleservices, Inc. and Teletech Holdings, Inc., in providing teleservices. As a result of these factors, there can be no assurance that competition from existing or potential competitors will not have a materially adverse effect on the Company's results of operations. See "Business - Competition." RISK OF BUSINESS INTERRUPTION; RELIANCE ON COMPUTER AND TELECOMMUNICATIONS INFRASTRUCTURE The Company's success is dependent in large part on its continued investment in sophisticated telecommunications and computer systems, including predictive dialers, automated call distribution systems and digital switching. The Company has invested significantly in technology in an effort to remain competitive and anticipates that it will be necessary to continue to do so in the future. Moreover, computer and telecommunication technologies are evolving rapidly and are characterized by short product life cycles, which requires the Company to anticipate technological developments. There can be no assurance that the Company will be successful in anticipating, managing or adopting such technological changes on a timely basis or that the Company will have the capital resources available to invest in new technologies. In addition, the Company's business is highly dependent on its computer and telecommunications equipment and software systems, the temporary or permanent loss of which, through casualty or operating malfunction, could have a materially adverse effect on the Company's business. The Company's business is materially dependent on service provided by various local and long distance telephone companies. A significant increase in the cost of telephone services that is not recoverable through an increase in the price of the Company's services, or any significant interruption in telephone services, could have a materially adverse impact on the Company. See "Business - Operations." DEPENDENCE ON LABOR FORCE The accounts receivable management industry is very labor intensive and experiences high personnel turnover. The Company experienced an annual personnel turnover rate of approximately 38% for 1995. Many of the Company's employees receive modest hourly wages and a portion of these employees are employed on a part-time basis. A higher turnover rate among the Company's employees would increase the Company's recruiting and training costs and could adversely impact the quality of services the Company provides to its clients. If the Company were unable to recruit and retain a sufficient number of employees, it would be forced to limit its growth or possibly curtail its operations. Growth in the Company's business will require it to recruit and train qualified personnel at an accelerated rate from time to time. There can be no assurance that the Company will be able to continue to hire, train and retain a sufficient number of qualified employees. Additionally, an increase in hourly wages, costs of employee benefits or employment taxes also could materially adversely affect the Company. See "Business - Personnel and Training." GOVERNMENT REGULATION The accounts receivable management and telemarketing industries are regulated under various federal and state statutes. In particular, the Company is subject to the federal Fair Debt Collection Practices Act which establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. The Company is also subject to the Fair Credit Reporting Act which regulates the consumer credit reporting industry and which may impose liability on the Company to the extent that the adverse credit information reported on a consumer to a credit 10 bureau is false or inaccurate. The accounts receivable management business is also subject to state regulation, and some states require that the Company be licensed as a debt collection company. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing and some states have enacted restrictions similar to the federal TCPA. The failure to comply with applicable statutes and regulations could have a materially adverse effect on the Company. There can be no assurance that additional federal or state legislation, or changes in regulatory implementation, would not limit the activities of the Company in the future or significantly increase the cost of regulatory compliance. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. See "Business -- Government Regulation." CONTROL BY PRINCIPAL SHAREHOLDERS Immediately following this Offering, Michael J. Barrist will beneficially own approximately 37.9% of the Common Stock (approximately 34.7% if the Underwriters' over-allotment option is exercised in full), and together with the other executive officers of the Company will beneficially own approximately 60.8% (approximately 55.3% if the Underwriters' over-allotment option is exercised in full). As a result of such voting concentration, Mr. Barrist, together with other executive officers of the Company, will be able to effectively control most matters requiring approval by the Company's shareholders, including the election of directors. Such voting concentration may have the effect of delaying, deferring or preventing a change in control of the Company. See "Management" and "Principal and Selling Shareholders." BENEFITS TO AFFILIATES; RELATED PARTY LEASES The principal shareholders of the Company will realize substantial benefits from the Offering. The Company will use approximately $3.0 million of the net proceeds of the Offering to make distributions of S Corporation earnings to shareholders of record on September 3, 1996, the date on which the Company terminated its S Corporation status. See "Dividend Policy and Prior S Corporation Status." The Company has entered into a distribution and tax indemnification agreement with such shareholders which provides for, among other things, an indemnification by the Company of such shareholders for any losses or liabilities with respect to any additional taxes resulting from the Company's operations during the period it was an S Corporation. See "Certain Transactions -- Distribution and Tax Indemnification Agreement." Such shareholders have also granted the Underwriters an over-allotment option and will receive cash proceeds in the Offering in the event such option is exercised. See "Underwriting." Additionally, the Company currently leases four facilities in Blue Bell, Pennsylvania from limited partnerships controlled by Mr. Barrist and the limited partners of which are the current shareholders of the Company. While the Company believes that such leases are on terms no less favorable to the Company than would have been obtained by unaffiliated parties, there can be no assurance that conflicts of interest will not arise in the future with respect to these leases. See "Certain Transactions -- Real Estate Matters." ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this Offering, there has been no public market for the Company's Common Stock. Application has been made for quotation of the Common Stock on the Nasdaq National Market. There can be no assurance that a viable public market for the Common Stock will develop or be sustained after the Offering or that purchasers of the Common Stock will be able to resell their Common Stock at prices equal to or greater than the initial public offering price. The initial public offering price has been determined by negotiations among the Company, 11 the Selling Shareholders and the representatives of the Underwriters and may not be indicative of the prices that may prevail in the public market after the Offering is completed. Numerous factors, including announcements of fluctuations in the Company's or its competitors' operating results and market conditions for accounts receivable management, telemarketing industry or business services stocks in general, the timing and announcement of acquisitions by the Company or its competitors or government regulatory action, could have a significant impact on the future price of the Common Stock. In addition, the stock market in recent years has experienced significant price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of the Common Stock. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Sales of the Company's Common Stock in the public market after the Offering could adversely affect the market price of the Company's Common Stock and could impair the Company's future ability to raise capital through the sale of equity securities. Upon completion of the Offering, the Company will have 6,713,447 shares of Common Stock outstanding. Of these shares, all of the shares sold in the Offering will be available for resale in the public market without restriction, except for any such shares which may be purchased by affiliates of the Company. The Company's directors, executive officers and existing shareholders have agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. Following the expiration of this 180-day period, such persons will hold an aggregate of 4,213,447 outstanding shares of Common Stock (3,838,447 shares if the over-allotment option is exercised in full) which may be resold under Rule 144. The Company also has or expects to have outstanding warrants to purchase 240,591 shares of Common Stock and a $1.0 million Convertible Note convertible into 83,333 shares of Common Stock (at an assumed conversion price of $12.00 per share) at any time on or before September 5, 2001. The holder of the warrants has agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exercise of the warrants for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. The warrants are entitled to certain demand and piggy-back registration rights following the completion of the Offering. In addition, the Company intends, as soon as practicable after the consummation of the Offering, to register approximately 464,390 shares of Common Stock reserved for issuance to its employees, directors, consultants and advisors under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan. Options to purchase an aggregate of 367,321 shares of Common Stock will be outstanding under all such plans upon the consummation of the Offering. See "Management -- Stock Option Plans," "Description of Capital Stock -- Warrants and Convertible Note" and "Shares Eligible for Future Sale." ANTI-TAKEOVER PROVISIONS The Company's Amended and Restated Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws") contain provisions which may be deemed to be "anti-takeover" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction. The Articles permit the Board of Directors to establish the rights, preferences, privileges and restrictions of, and to issue, up to 5,000,000 shares of Preferred Stock without shareholder approval. The Company's Bylaws also provide for the staggered election of directors to serve for one-, two- and three-year terms, and for successive three-year terms thereafter, subject to removal only for cause upon the vote of not less than 65% of the shares of Common Stock represented at a shareholders' meeting. Certain provisions of the Articles and Bylaws may not be amended except by a similar 65% vote. In addition, the Company is subject to certain anti-takeover provisions of the Pennsylvania Business Corporation Law. See "Description of Capital Stock." DILUTION Purchasers of Common Stock in this Offering will experience immediate dilution in net tangible book per share of Common Stock of $10.15 from the initial public offering price per share. See "Dilution." 12 ACQUISITION HISTORY Since 1994, the Company has completed four strategic acquisitions which have expanded its client base and geographic presence, increased its presence in key industries and substantially increased its revenues and profitability. A key element of the Company's growth strategy is to pursue selected strategic acquisitions to serve new geographic markets or industries, expand its presence in its existing markets or add complementary service applications. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however, as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. A summary of the completed acquisitions follows: MANAGEMENT ADJUSTMENT BUREAU, INC. On September 5, 1996, NCO purchased all of the outstanding stock of MAB for $8.0 million in cash and a $1.0 million convertible note. The note is convertible into the Company's Common Stock at any time after the Company's initial public offering at the initial public offering price and bears interest payable monthly at a rate of 8.0% per annum with principal due in September 2001. MAB, based in Buffalo, New York, provides accounts receivable management services, principally to the education, financial services, telecommunications and utility industries. MAB's clients include NationsBank, NYNEX, Marine Midland Bank and Boston Edison. MAB's revenues were $13.0 million for the year ended December 31, 1995 and $6.8 million for the six months ended June 30, 1996. The Company will continue to operate MAB's facilities in Buffalo and Denver, Colorado. The Company has begun to realize operating efficiencies from the MAB acquisition and has reduced compensation and related expenses associated with MAB's principal shareholder, eliminated redundant collection and administrative personnel, and begun to reduce selling, general and administrative expenses to levels more consistent with NCO's current operating results. NCO will also consolidate certain company-wide administrative functions such as human resources and payroll administration into MAB's Buffalo facility, resulting in the reduction of certain NCO administrative costs. TRANS UNION CORPORATION COLLECTIONS DIVISION On January 3, 1996, NCO purchased certain assets of TCD for $4.8 million in cash. TCD provided accounts receivable management services, principally to the telecommunications, utility and healthcare industries from offices in Pennsylvania, Ohio and Kansas. TCD's clients included Bell Atlantic Corporation, Western Resources Corporation and Hutchinson Hospital Corporation. TCD's revenues were $7.5 million for the year ended December 31, 1995. Promptly following the TCD acquisition, the Company reduced costs by eliminating redundant collection and administrative personnel, closing one office and reducing other selling, general and administrative expenses to levels more consistent with NCO's current operating results. EASTERN BUSINESS SERVICES, INC. In August 1995, NCO purchased certain assets of Eastern for $1.6 million in cash and the assumption of a non-interest bearing note payable in the amount of $252,000 and certain other accounts payable in the amount of $209,000. Eastern, based in Beltsville, Maryland, provided accounts receivable management services, principally to the utility and healthcare industries. Eastern's clients included Bell Atlantic Corporation and George Washington University Hospital. Promptly following the Eastern acquisition, the Company reduced costs by eliminating redundant collection and administrative personnel and reducing selling, general and administrative expenses to levels more consistent with NCO's current operating results. B. RICHARD MILLER, INC. In April 1994, NCO purchased certain assets of BRM for $1.0 million in cash, the issuance by the Company of a $127,000 promissory note and the issuance of 123,803 shares of Common Stock and an option to acquire 86,881 shares of Common Stock at an exercise price of $2.16 per share (which option was exercised in 1995). In connection with the acquisition, BRM's principal shareholder became an executive officer of the Com- 13 pany. BRM, based in Ardmore, Pennsylvania, provided accounts receivable management services, principally to the education industry. BRM's clients included University of Pennsylvania, Rutgers University and Seton Hall University. Promptly following the BRM acquisition, the Company reduced costs by eliminating redundant collection and administrative personnel, closing BRM's sole office and reducing other selling, general and administrative expenses to levels more consistent with NCO's current operating results. FINANCIAL IMPACT OF ACQUISITIONS The Company financed the MAB, TCD, Eastern and BRM acquisitions with borrowings from Mellon Bank, N.A. The bank recently increased the Company's revolving credit facility from $7.0 million to $15.0 million to finance the acquisition of MAB. The revolving credit facility currently bears interest at the rate of prime plus 1.375%. The bank has issued a commitment letter to further increase this facility to $25.0 million at an interest rate of LIBOR plus 2.5% upon the completion of the Offering, provided that the Offering results in minimum net proceeds to the Company of $24.0 million. The Company granted the bank a warrant to acquire 175,531 shares of Common Stock at a nominal exercise price in consideration for establishing the revolving credit facility for acquisitions, and granted an additional warrant to purchase 46,560 shares of Common Stock at an exercise price equal to the initial public offering price in consideration for increasing the revolving credit facility to $15.0 million. The warrants are exercisable at any time after the consummation of the Offering and prior to July 31, 2005. The Company also has agreed to grant an additional warrant to purchase 18,500 shares of Common Stock at an exercise price equal to the initial public offering price in consideration for increasing the revolving credit facility to $25.0 million. The acquisitions have been accounted for under the purchase method of accounting for financial reporting purposes. These acquisitions have created goodwill estimated at $14.5 million which is being amortized over a 15- to 25-year period resulting in amortization expense of approximately $749,000 annually. Pro forma statements of income for the year ended December 31, 1995 and the six months ended June 30, 1996 appearing elsewhere in this Prospectus assume that the MAB, TCD and Eastern acquisitions had occurred on January 1, 1995 and January 1, 1996, respectively. Pro forma adjustments have been made to reflect the elimination of certain expenses that were immediately identifiable and promptly realized at the time of the acquisitions, including the immediate elimination of certain redundant collection and administrative personnel. These and other expense adjustments are summarized in the table below and related footnotes.
Year Ended Six Months Ended December 31, June 30, 1995 1996 -------------- ---------------- Redundant collection and administrative personnel $1,437,268 $ 407,400 MAB principal shareholder compensation (1) ...... 643,500 321,750 -------------- ---------------- Total payroll and related expense reductions 2,080,768 729,150 TCD occupancy costs (2) ......................... 260,300 -- Depreciation and amortization (3) ............... (379,216) (160,705) -------------- ---------------- Total operating cost and expense adjustments $1,961,852 $ 568,445 ============== ================
- ------ (1) Reflects the reduction of the salary of MAB's principal shareholder (who is no longer active in the day-to-day operations of MAB's business) pursuant to an employment agreement. (2) Reflects the difference between the Company's rent expense for the TCD facilities pursuant to lease agreements entered into upon the acquisition and the occupancy costs allocated to TCD by its parent prior to the acquisition. (3) Reflects additional amortization expense, assuming MAB, TCD, and Eastern had been acquired at the beginning of the periods presented, partially offset in the year ended December 31, 1995 by depreciation reductions relating to assets not acquired by NCO as part of the TCD and Eastern acquisitions. 14 In each of the acquisitions, the Company acquired businesses with higher cost structures than the Company. In the months following the acquisitions of TCD, Eastern and BRM, the Company leveraged its existing infrastructure to realize additional operating efficiencies in order to bring the cost structure of acquired companies in line with NCO's current operating results. These other cost savings include: (i) further reductions in payroll and related expenses relating primarily to redundant collections and administrative personnel, (ii) further reduction in rent and other facilities costs, and (iii) reduction in certain expenses such as telephone, mailing and data processing. While management believes it will realize similar cost savings from the MAB acquisition, the Company's ability to achieve such cost savings is uncertain and there can be no assurance that MAB's business will be successfully integrated with that of the Company, or that the Company will be able to realize operating efficiencies or eliminate redundant costs. See "Risk Factors -- Risks Associated with TCD and MAB Acquisitions" and " -- Risks Associated with Future Acquisitions." 15 USE OF PROCEEDS The net proceeds from the sale of the 2,500,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $26.8 million after deducting the estimated underwriting discounts and expenses of the Offering and based on an assumed initial public offering price of $12.00 per share. In the event the Underwriters' over-allotment option is exercised, the Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. Approximately $15.0 million of the net proceeds will be used to repay outstanding debt under the Company's Credit Agreement with Mellon Bank, N.A. The Company entered into the Credit Agreement in July 1995 to obtain working capital and acquisition financing and to refinance certain existing debt. The Credit Agreement, as amended, provides a revolving line of credit which permits borrowings of up to $15.0 million at an interest rate equal to the prime rate plus 1.375% (9.625% at August 31, 1996). The bank has issued a commitment letter to increase this facility to $25.0 million at an interest rate of LIBOR plus 2.5% upon the completion of the Offering provided that the Offering results in minimum net proceeds to the Company of $24.0 million. Borrowings under the Credit Agreement were used to fund the MAB, TCD and Eastern acquisitions and to refinance indebtedness incurred in connection with the BRM acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company also will use a portion of the net proceeds to make distributions to shareholders of record on September 3, 1996, the date on which the Company terminated its S Corporation status (the "S Corporation Distributions"). The amount of the distributions will equal all undistributed S Corporation earnings, estimated at $3.0 million as of September 3, 1996, subject to final adjustment. The Company intends to use the remaining net proceeds of $8.8 million for working capital and other general corporate purposes, including future acquisitions. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however, as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. Pending the uses described above, the Company intends to invest its net proceeds in short-term, investment-grade securities. DIVIDEND POLICY AND PRIOR S CORPORATION STATUS The Company historically was treated for federal and state income tax purposes as an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and under Pennsylvania law. As a result of the Company's status as an S Corporation, the Company's shareholders, rather than the Company, were taxed directly on the earnings of the Company for federal and certain state income tax purposes, whether or not such earnings were distributed. The Company made cash distributions to the current shareholders aggregating $658,000, $813,000, $1.1 million and $752,000 in respect of the Company's S Corporation earnings for 1993, 1994 and 1995, and for the six months ended June 30, 1996, respectively. On September 3, 1996 (the "Termination Date"), the Company terminated its status as an S Corporation and thereupon became subject to federal and state income taxes at applicable C Corporation rates. The Company declared a distribution to existing shareholders in an aggregate amount equal to the Company's undistributed S Corporation earnings through the Termination Date, which are estimated at $3.0 million, subject to final adjustment. The Company expects to pay the S Corporation Distributions with a portion of the net proceeds of this Offering. See "Use of Proceeds." The Company has also entered into a distribution and tax indemnification agreement with its current shareholders with respect to taxes resulting from the Company's operations during the period in which it was an S Corporation. See "Certain Transactions--Distribution and Tax Indemnification Agreement." Purchasers of shares of Common Stock in this Offering will not receive any of the S Corporation Distributions or any distribution with respect to any indemnification payment to the current shareholders. The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the Company's Credit Agreement prohibits the Company from paying cash dividends without the lender's prior consent. The Company currently intends to retain future earnings to finance its operations and fund the growth of its business. Any payment of future dividends will be at the discretion of the Board of Directors of the Company and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Company's Board of Directors deems relevant. 16 CAPITALIZATION The following table sets forth as of June 30, 1996 the current portion of long-term debt and capitalized lease obligations and the actual capitalization of the Company and the pro forma, as adjusted, capitalization of the Company which gives effect to: (i) the MAB acquisition and (ii) the sale of the 2,500,000 shares of Common Stock in the Offering (at an assumed initial public offering price of $12.00 per share), and the application of the net proceeds therefrom as set forth in "Use of Proceeds." This table should be reviewed in conjunction with the Company's historical and pro forma financial statements and related notes appearing elsewhere in this Prospectus.
June 30, 1996 -------------------------- Pro Forma Actual As Adjusted --------- ------------- (In thousands) Current portion of long-term debt and capitalized lease obligations $ 101 $ 270 ========= ============= Long-term debt, net of current portion (1): Revolving credit agreement .................................... $ 7,118 $ 323 Capitalized lease obligations ................................. 238 387 Convertible note payable ...................................... -- 1,000 --------- ------------- Total long-term debt and capitalized lease obligations ... 7,356 1,710 Shareholders' equity: Preferred Stock, no par value, 5,000,000 shares authorized; no shares issued or outstanding ................................ -- -- Common Stock, no par value, 25,000,000 shares authorized; 4,213,447 shares issued and outstanding, actual, 6,713,447 shares issued and outstanding, pro forma as adjusted (2) .... 537 26,756 Unexercised warrant (3) ....................................... 177 177 Unrealized gains on securities ................................ 48 48 Retained earnings (4) ......................................... 2,388 0 --------- ------------- Total shareholders' equity ............................... 3,150 26,981 --------- ------------- Total capitalization ..................................... $10,506 $28,691 ========= =============
- ------ (1) See Notes 7, 9 and 13 of Notes to Financial Statements for a description of the terms of the Company's debt. (2) Excludes: (i) an aggregate of 464,390 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 240,591 shares of Common Stock reserved for issuance upon the exercise of warrants granted or to be granted to Mellon Bank, N.A.; and (iii) 83,333 shares of Common Stock reserved for issuance upon the conversion of the Company's $1.0 million Convertible Note (at an assumed conversion price of $12.00 per share). See "Acquisition History," "Management -- Stock Option Plans" and "Description of Capital Stock -- Warrants and Convertible Note." (3) Reflects a warrant to purchase 175,531 shares of Common Stock at a nominal exercise price issued by the Company to Mellon Bank, N.A. in July 1995. (4) Pro forma as adjusted retained earnings are reduced for the estimated S Corporation Distributions of $3.0 million but are partially offset by the establishment of a deferred tax asset of $81,000, assuming the Company converted from an S Corporation at June 30, 1996. S Corporation Distributions in excess of retained earnings at June 30, 1996 are deducted from Common Stock. 17 DILUTION At June 30, 1996, the net tangible book value of the Company was approximately $(3.4) million, or $(0.80) per share of Common Stock. Net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding. The pro forma net tangible book value, after giving effect to the MAB acquisition and the S Corporation Distributions but without giving effect to the Offering would have been $(14.3) million, or $(3.40) per share. After giving further effect to the sale by the Company of 2,500,000 shares of Common Stock in the Offering (assuming an initial public offering price of $12.00 per share) and the application of the estimated net proceeds therefrom after deducting estimated underwriting discounts and offering expenses payable by the Company, the pro forma net tangible book value of the Company at June 30, 1996 would have been approximately $12.4 million, or $1.85 per share of Common Stock. This represents an immediate increase in the pro forma net tangible book value of $5.25 per share of Common Stock to existing shareholders and an immediate dilution in pro forma net tangible book value of $10.15 per share of Common Stock to new investors. The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share ........................ $12.00 Net tangible book value per share at June 30, 1996 ................. $(0.80) Pro forma adjustments for MAB acquisition and S Corporation Distributions .................................................... (2.60) --------- Pro forma net tangible book value per share before the Offering .... (3.40) Increase per share attributable to new investors ................... 5.25 --------- Pro forma net tangible book value per share, as adjusted for the Offering 1.85 -------- Dilution per share to new investors ..................................... $10.15 ========
The following table sets forth, as of June 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the Company's existing shareholders and by the new investors purchasing shares of Common Stock from the Company in the Offering (before deducting estimated underwriting discounts and offering expenses payable by the Company):
Shares Purchased (1) Total Consideration ------------------------ -------------------------- Average Price Number Percent Amount Percent Per Share ----------- --------- ------------- --------- --------------- Existing shareholders 4,213,447 62.8% $ 537,326 1.8% $ 0.13 New investors ........ 2,500,000 37.2 30,000,000 98.2 12.00 ----------- --------- ------------- --------- --------------- Total .............. 6,713,447 100.0% $30,537,326 100.0% =========== ========= ============= =========
- ------ (1) Excludes: (i) an aggregate of 464,390 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 175,531 shares of Common Stock reserved for issuance to Mellon Bank, N.A. at a nominal exercise price and 65,060 shares reserved for issuance pursuant to warrants granted or to be granted with an exercise price equal to the initial public offering price; and (iii) 83,333 shares of Common Stock reserved for issuance upon the conversion of the Company's $1.0 million Convertible Note (at an assumed conversion price of $12.00 per share). See "Acquisition History," "Management -- Stock Option Plans" and "Description of Capital Stock -- Warrants and Convertible Note." 18 SELECTED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The selected financial and operating data of the Company for each of the five years in the period ended December 31, 1995 are derived from the financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected financial and operating data as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 are derived from the unaudited financial statements of the Company and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results of operations and financial position for such periods. The results for the six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the full year. The following data should be read in conjunction with the Company's actual and pro forma consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
Years Ended December 31, --------------------------------------------------------------------------------------- 1991 1992 1993 1994 1995 ----------- ----------- ----------- ----------- ------------------------------ Pro Actual Forma(1)(2) ------- ------------- Statement of Income Data: Revenue ............ $ 3,792 $ 5,822 $ 7,445 $ 8,578 $ 12,733 $ 34,509 Operating costs and expenses: Payroll and related expenses ...... 1,892 3,058 4,123 4,558 6,797 16,412 Selling, general and administrative expenses ...... 1,457 2,013 2,391 2,674 4,042 12,531 Depreciation and amortization expense ....... 40 95 141 215 348 1,529 ----------- ----------- ----------- ----------- -------------- ------------ Income from operations ...... 403 656 790 1,131 1,546 4,037 Other income (expense) (1) 15 11 (45) (180) (212) ----------- ----------- ----------- ----------- -------------- ------------ Income before income taxes ........... 402 671 801 1,086 1,366 3,825 Pro forma provision for income taxes (4) . 160 268 320 434 546 1,659 ----------- ----------- ----------- ----------- -------------- ------------ Pro forma net income(4) $ 242 $ 403 $ 481 $ 652 $ 820 $ 2,166 =========== =========== =========== =========== ============== ============ Pro forma net income per share ........... $ 0.17(5) $ 0.35 $ 0.22(5) $ 0.23 ============== ============ Pro forma weighted average shares outstanding ..... 4,745,229(5) 6,211,179 ============== ============ Operating Data: Total value of accounts referred ........ $178,529 $150,707 $199,108 $281,387 $ 431,927 $1,134,000 Average fee ........ 14.4% 16.9% 20.2% 22.5% 22.4% N/A
Six Months Ended June 30, -------------------------------------------- 1995 1996 ----------- ------------------------------ Pro Actual Forma(2)(3) ------ ----------- Statement of Income Data: Revenue ............ $ 5,546 $ 12,543 $ 19,319 Operating costs and expenses: Payroll and related expenses ...... 2,956 5,954 9,479 Selling, general and administrative expenses ...... 1,745 4,095 6,516 Depreciation and amortization expense ....... 116 423 833 ----------- -------------- ------------ Income from operations ...... 729 2,071 2,491 Other income (expense) (73) (310) (19) ----------- -------------- ------------ Income before income taxes ........... 656 1,761 2,472 Pro forma provision for income taxes (4) . 262 704 1,053 ---------- ---------- ---------- Pro forma net income(4) $ 1,057 $ 1,419 ========== ========== Pro forma net income per share ........... $ 0.22(5) $ 0.23 ========= ========== Pro forma weighted average shares outstanding ..... 4,750,259(5) 6,216,209 ========== ========== Operating Data: Total value of accounts referred ........ $ $180,783 $ 373,499 $ 664,905 Average fee ........ 21.7% 24.0% 24.3%
December 31, June 30, 1996 ------------------------------------------------ -------------------------- Pro Forma 1991 1992 1993 1994 1995 Actual As Adjusted(6) ------- ------- ------- ------- ------- -------- -------------- Balance Sheet Data: Cash and cash equivalents .......... $ 355 $ 421 $ 562 $ 526 $ 805 $ 990 $ 9,515 Working capital .................... 179 362 445 473 812 2,458 11,600 Total assets ....................... 1,546 2,177 2,449 4,106 7,873 14,655 35,263 Long-term debt, net of current portion .......................... 108 144 59 732 2,593 7,356 1,710 Shareholders' equity ............... 403 686 876 1,423 2,051 3,151 26,982
19 (1) Assumes that the acquisitions of MAB, TCD and Eastern occurred on January 1, 1995. (2) Gives effect to: (i) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (ii) the elimination of interest expense associated with acquisition related debt assumed to be repaid with offering proceeds; and (iii) the issuance of 1,715,950 shares of Common Stock (at an assumed initial public offering price of $12.00 per share) which, net of estimated underwriting commissions and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $15.0 million and to fund the distribution of undistributed S Corporation earnings through the Termination Date (estimated at $3.0 million) to existing shareholders of the Company. See Pro Forma Consolidated Financial Statements. (3) Assumes that the acquisition of MAB occurred on January 1, 1995. (4) Prior to the Termination Date, the Company operated as an S Corporation for income tax purposes and accordingly was not subject to federal or state income taxes prior to such date. Accordingly, the historical financial statements do not include a provision for federal and state income taxes for such periods. Pro forma net income has been computed as if the Company had been fully subject to federal and state income taxes for all periods presented. See Note 12 of Notes to Pro Forma Consolidated Financial Statements. (5) Assumes that the Company issued 250,000 shares of Common Stock (at an assumed initial public offering price of $12.00 per share) to fund the distribution of undistributed S Corporation earnings (estimated at $3.0 million) through the Termination Date to existing shareholders of the Company. (6) Gives effect to: (i) the MAB acquisition and (ii) the sale of the 2,500,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $12.00 per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds." 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW NCO is a leading provider of accounts receivable management and other related services such as customer service call centers, telemarketing, telephone-based auditing and other outsourced administrative services. In 1995, accounts receivable management services comprised more than 95% of the Company's revenue; however, the Company expects other related services to represent a greater portion of its business in the future. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $34.5 million in 1995 on a pro forma basis, giving effect to the Eastern, TCD and MAB acquisitions. Currently, NCO operates eight call centers with 689 workstations in Pennsylvania, New York, Maryland, Ohio, Kansas and Colorado. The Company has historically generated substantially all of its revenue from the recovery of delinquent accounts receivable on a contingency fee basis. Contingency fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients, but can range from 6% for the management of accounts placed early in the recovery cycle to 50% for accounts which have been serviced extensively by the client or by other third-party providers. In addition, the Company generates revenue from fixed fees for certain accounts receivable management and other related services. Revenue is earned and recognized upon collection of the accounts receivable for contingency fees and as work is performed for fixed fee services. Although its average accounts receivable management fee has increased from 20.2% in 1993 to 24.0% for the six months ended June 30, 1996, the Company expects to remain among the low cost providers of accounts receivable management services; accordingly, the Company does not expect its average contingency fee to increase materially in the future. The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to the Company prior to the date of termination, thus providing the Company with an ongoing stream of revenue from such accounts which diminishes over time. The Company's costs consist principally of payroll and related costs, selling, general and administrative costs, and depreciation and amortization. Payroll costs and related expenses consist of wages and salaries, commissions, bonuses and benefits for all employees of the Company, including management and administrative personnel. As the Company has grown, payroll costs as a percentage of revenue have gradually declined. Selling, general and administrative expenses, which include postage, telephone and mailing costs, and other costs of collections as well as expenses which directly support the operations of the business including facilities costs, equipment maintenance, sales and marketing, data processing, professional fees and other management costs, have remained relatively constant as a percentage of revenue since 1993. Since 1994, the Company has made four acquisitions which have had a significant impact on the Company's financial condition and results of operations. With the BRM, Eastern, TCD and MAB acquisitions, the Company has: (i) increased its penetration of the utilities, healthcare, financial services and telecommunications markets; (ii) established a presence in the education and insurance markets; (iii) increased its base of national clients; and (iv) expanded NCO's geographic presence by adding six offices in six states. Pro forma revenues from these four acquired businesses accounted for approximately 69.5% of the Company's pro forma revenue in 1995. With this rapid increase in revenues, the Company has been able to achieve significant economies of scale by eliminating certain redundant expenses, reducing the workforce of the acquired companies, and in the case of BRM and TCD, closing two offices. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. In pursuing acquisitions, the Company typically seeks to serve new geographic markets or industries, expand its presence in its existing markets or add complementary services. Upon completion of an acquisition, the Company immediately focuses on achieving operating efficiencies by eliminating redundant expenses and reducing certain other expenses to levels consistent with the Company's current operating results. Included elsewhere in this prospectus are Pro Forma Consolidated Financial Statements which show the effect 21 of the Eastern, TCD and MAB acquisitions as if the results of each acquired company had been included in the Company's statement of income throughout the year ended December 31, 1995 and the six months ended June 30, 1996 and for balance sheet purposes at June 30, 1996. For the periods shown, the Company had been treated for federal and state income tax purposes as an S Corporation. As a result, the Company's shareholders, rather than the Company, were taxed directly on the earnings of the Company for federal and certain state income tax purposes. The Company terminated its status as an S Corporation effective September 3, 1996 and is now subject to federal and state income taxes at applicable C Corporation rates. Accordingly, the pro forma provision for income taxes assumes that the Company was subject to federal and state income taxes for all prior periods. RESULTS OF OPERATIONS The following tables set forth income statement data on an historical and pro forma basis as a percentage of revenue:
Years Ended December 31, Six Months Ended June 30, ------------------------------------------ ------------------------------- 1993 1994 1995 1995 1996 -------- -------- -------------------- -------- -------------------- Pro Pro Actual Forma Actual Forma -------- -------- -------- -------- Revenue ...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Payroll and related expenses 55.4 53.1 53.4 47.6 53.3 47.5 49.1 Selling, general and administrative expenses . 32.1 31.2 31.7 36.3 31.5 32.6 33.7 Depreciation and amortization expense .. 1.9 2.5 2.7 4.4 2.1 3.4 4.3 -------- -------- -------- -------- -------- -------- -------- Total .............. 89.4 86.8 87.8 88.3 86.9 83.5 87.1 -------- -------- -------- -------- -------- -------- -------- Income from operations ....... 10.6 13.2 12.2 11.7 13.1 16.5 12.9 Other income (expense) ....... 0.1 (0.5) (1.4) (0.6) (1.3) (2.5) (0.1) -------- -------- -------- -------- -------- -------- -------- Income before income taxes ... 10.7 12.7 10.8 11.1 11.8 14.0 12.8 Pro forma provision for income taxes ...................... 4.3 5.1 4.3 4.8 4.7 5.6 5.5 -------- -------- -------- -------- -------- -------- -------- Pro forma net income ......... 6.4% 7.6% 6.5% 6.3% 7.1% 8.4% 7.3% ======== ======== ======== ======== ======== ======== ========
PRO FORMA COMPARED TO ACTUAL RESULTS OF OPERATIONS Pro forma operating data for the year ended December 31, 1995 and the six months ended June 30, 1996 assume that the MAB, TCD and Eastern acquisitions were consummated at the beginning of the respective periods. Pro forma adjustments have been made to reflect the elimination of certain expenses that were immediately identifiable at the time of the acquisitions, including the immediate elimination of certain redundant collection and administrative personnel. See "Acquisition History -- Financial Impact of Acquisitions" and "Notes to Pro Forma Consolidated Financial Statements." In each of the acquisitions, the Company acquired businesses with higher cost structures than the Company. In the months following the acquisitions of TCD, Eastern and BRM, the Company leveraged its infrastructure to realize additional operating efficiencies in order to bring the cost structure of acquired companies in line with NCO's current operating results. These other cost savings include: (i) further reductions in payroll and related expenses relating primarily to redundant collections and administrative personnel, (ii) further reduction in rent and other facilities costs, and (iii) reduction in certain expenses such as telephone, mailing and data processing. Management believes it will realize similar cost savings from the MAB acquisition, although no assurances can be given that such cost savings will be realized. Due to the higher cost structures of the acquired businesses and the fact that all expected expense savings are not reflected in pro forma adjustments, certain pro forma operating percentages compare unfavorably to actual operating percentages for the periods under consideration. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 Revenue. Revenue increased $7.0 million or 126.1% to $12.5 million for the six-month period ended June 30, 1996 from $5.5 million for the comparable period in 1995. Of this increase, $3.7 million was attributable to 22 the TCD acquisition completed in January 1996, and $1.0 million was attributable to the Eastern acquisition completed in August 1995. Additionally, $973,000 of the increase was due to a full six months of revenue in 1996 from a contract awarded to the Company by a government agency in April 1995. Revenue from other related services, which became an area of focus in 1996, increased $586,000 to $682,000 for the six months ended June 30, 1996 from $96,000 for the comparable period in 1995. The balance of the revenue increase was attributable to the addition of new clients and a growth in business from existing clients. Payroll and related expenses. Payroll and related expenses increased $3.0 million to $6.0 million for the six months ended June 30, 1996 from $3.0 million for the comparable period in 1995, but decreased as a percentage of revenue to 47.5% from 53.3%. The decrease in payroll and related expenses as a percentage of revenue was primarily the result of spreading the relatively fixed costs of management and administrative personnel over a larger revenue base, as well as eliminating redundant administrative staff following the TCD and Eastern acquisitions. Selling, general and administrative expenses. Selling, general and administrative expenses increased $2.4 million to $4.1 million for the six months ended June 30, 1996, from $1.7 million for the comparable period in 1995, and also increased as a percentage of revenue to 32.6% from 31.5%. A large percentage of the increase was due to the increased costs associated with litigation management services performed by the Company on behalf of its clients in states where the laws are more conducive to the utilization of the legal process for the recovery of delinquent accounts. In addition, the Company experienced increased costs as a result of a change in business mix which required the increased use of national databases and credit reporting services. These increases were offset in part by operating efficiencies resulting from the TCD acquisition. Depreciation and amortization. Depreciation and amortization increased to $423,000 for the six months ended June 30, 1996 from $116,000 for the comparable period in 1995. Of this increase, $233,000 was a result of the TCD and Eastern acquisitions. The remaining $74,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest expense increased $309,000 for the six months ended June 30, 1996 from the comparable period in 1995, primarily due to increased borrowings associated with the acquisitions of TCD and Eastern. Other income (expense) for the six months ended June 30, 1995, also included a loss from the disposal of assets of $49,000. Net income. Net income pro forma for taxes increased to $1.1 million for the six months ended June 30, 1996 from $394,000 for the comparable period in 1995, a 168% increase. Net income pro forma for taxes includes a provision for federal and state income taxes at an assumed rate of 40% for the six months ended June 30, 1996 and 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenue. Revenue increased $4.2 million or 48.4% to $12.7 million in 1995 from $8.6 million in 1994. In 1995, the Company initiated a marketing program targeted at larger, national accounts. As a result, the Company experienced 38% internal growth from the addition of new clients and growth in business from existing clients. This growth includes approximately $1.3 million from a contract with a governmental agency awarded in April 1995. In addition to strong internal growth, approximately $808,000 of the increase in revenue was attributable to the Eastern acquisition, and $437,000 was attributable to a full year of operations of BRM in 1995 versus eight months in 1994. This was partially offset by a decrease in revenue from outsourcing projects to $259,000 in 1995 from $357,000 in 1994. Approximately $300,000 of revenue from outsourcing projects in 1994 was from a one-time project completed in the first quarter of 1994. Payroll and related expenses. Payroll and related expenses increased $2.2 million to $6.8 million in 1995 from $4.6 million in 1994, and increased slightly as a percentage of revenue to 53.4% from 53.1%. During the fourth quarter of 1995, the Company hired a Vice President of Collection, as well as 20 additional telephone representatives necessary for two outsourcing projects which did not generate revenue until the first quarter of 1996. In addition, the one-time outsourcing project completed during the first quarter of 1994 had lower payroll and related expenses as a percentage of revenue. The increases in personnel were partially offset by spreading the relatively fixed costs of the Company's management and administrative personnel over a larger revenue base, as well as the elimination of redundant administrative staff related to the Eastern acquisition. 23 Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.3 million to $4.0 million in 1995, from $2.7 million in 1994 and increased as a percentage of revenue to 31.7% from 31.2%. These increases were primarily due to higher data processing and facilities costs in anticipation of growth and to allow for the rapid assimilation of the TCD acquisition in the first quarter of 1996 without having to purchase short-term administrative services from the parent company of TCD during the post-acquisition transition. Depreciation and amortization. Depreciation and amortization increased to $348,000 in 1995 from $215,000 in 1994. Of this increase, $90,000 was attributable to the Eastern and BRM acquisitions. The remaining $43,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest expense increased to $180,000 in 1995 from $72,000, primarily due to increased borrowings associated with the Eastern and BRM acquisitions. The Company recorded a $49,000 loss from the disposal of assets in 1995. Net income. Net income pro forma for taxes increased to $820,000 for the year ended December 31, 1995 from $652,000 in 1994, representing a 25.7% increase. Net income pro forma for taxes includes a provision for federal and state income taxes at an assumed rate of 40% for the years ended December 31, 1995 and 1994. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Revenue. Revenue increased $1.2 million or 15.2% to $8.6 million in 1994 from $7.4 million in 1993. Of this increase, $959,000 was attributable to the BRM acquisition completed in April 1994. The remainder of the increase was due to the addition of new clients and from growth in business from existing clients, partially offset by a reduction resulting from the completion of the one-time client project in February 1994. Payroll and related expenses. Payroll and related expenses increased $436,000 to $4.6 million in 1994 from $4.1 million in 1993, but as a percentage of revenue, decreased to 53.1% from 55.4%. Payroll and related expenses as a percentage of revenue were lower in 1994 primarily as a result of spreading the relatively fixed costs of the Company's management and administrative personnel over a larger revenue base, as well as the elimination of duplicative administrative staff related to the BRM acquisition. Selling, general and administrative expenses. Selling, general and administrative expenses increased $283,000 to $2.7 million in 1994, from $2.4 million in 1993. As a percentage of revenue, selling, general and administrative expenses decreased to 31.2% from 32.1%. During 1993, the Company performed services under a one-time contract which had a lower cost structure than the Company's core business; however, in 1994, the Company was able to achieve economies of scale by spreading its fixed costs over a larger revenue base. The Company also closed an office and eliminated duplicative costs in connection with the BRM acquisition. Depreciation and amortization. Depreciation and amortization increased to $215,000 in 1994 from $141,000 in 1993. Of this increase, $61,000 was the result of the BRM acquisition. The remaining $13,000 consisted of depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest expense increased to $72,000 in 1994 from $14,000 in 1993, primarily due to increased borrowings associated with the BRM acquisition. Net income. Net income pro forma for taxes increased to $652,000 for the year ended December 31, 1994 from $481,000 in 1993, representing a 35.6% increase. Net income pro forma for taxes includes a provision for federal and state income taxes at an assumed rate of 40% for the years ended December 31, 1994 and 1993. QUARTERLY RESULTS The following table sets forth selected actual historical financial data for the calendar quarters of 1994 and 1995, and for the first two calendar quarters of 1996. This quarterly information is unaudited but has been prepared on a basis consistent with the Company's audited financial statements presented elsewhere herein and, in the Company's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period. 24
Quarter Ended -------------------------------------------------------------------------------------------------------------- 1994 1995 1996 ------------------------------------------- ------------------------------------------ -------------------- Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec. Mar. Jun. 31 30 30 31 31 30 30 31 31 30 --------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (dollars in thousands) Revenue ..... $2,087 $2,147 $2,188 $2,156 $2,544 $3,002 $3,480 $3,707 $6,044 $6,499 Income from operations . 431 173 280 247 244 485 496 320 915 1,156 Net income .. 436 160 262 228 227 429 460 250 760 1,001
Quarter Ended ------------------------------------------------------------------------------------------------------------- 1994 1995 1996 ------------------------------------------ ------------------------------------------ -------------------- Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec. Mar. Jun. 31 30 30 31 31 30 30 31 31 30 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (as a percentage of revenue) Revenue ..... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Income from operations . 20.7 8.0 12.8 11.5 9.6 16.2 14.3 8.6 15.1 17.8 Net income .. 20.9 7.4 12.0 10.6 8.9 14.3 13.2 6.7 12.6 15.4
In the past, the Company has experienced quarterly fluctuations in operating expenses. Due to the low revenue base of the Company at the time these costs were incurred, the impact of these fluctuations was more significant than if they had occurred at the Company's current revenue base. For instance, the fourth quarter of 1995 included additional costs primarily due to increases in data processing and facilities costs in anticipation of growth and to allow for the rapid assimilation of the TCD acquisition. The second quarter of 1994 included $94,000 of moving and acquisition costs related to the BRM acquisition. The first quarter of 1994 included $300,000 of revenue related to the completion of a project which had a lower than normal cost structure. The Company could experience quarterly variations in revenue and operating income as a result of many factors, including the timing of clients' referrals of accounts, the timing of acquisitions that may be effected in the future, the timing of the hiring of personnel, the timing of additional selling, general and administrative expenses incurred to support new business and changes in the Company's revenue mix among its various service offerings. In connection with certain contracts, the Company could incur costs in periods prior to recognizing revenue under those contracts. In addition, the Company must plan its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecast in any quarter would likely adversely affect the Company's operating results for the quarter. While the effects of seasonality of NCO's business have historically been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarter of the year due to the summer and the holiday seasons. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash have historically been cash flow from operations and bank borrowings. Cash has been used for acquisitions of accounts receivable management companies and distributions to shareholders, and for purchases of equipment and working capital to support the Company's growth. Cash provided by operating activities was $1.7 million, $2.0 million, $1.1 million, and $980,000 for the six months ended June 30, 1996, and for the years 1995, 1994, and 1993, respectively. The increases in each period were due to increases in net income before non-cash charges which were partially offset by cash used for working capital during the six months ended June 30, 1996 and the calendar year 1994; and partially increased by decreases in working capital for the years 1993 and 1995. Cash used in investing activities was $5.3 million, $2.0 million, $1.1 million, and $135,000 for the six months ended June 30, 1996 and for the years 1995, 1994, and 1993, respectively. In April 1994 the Company purchased certain assets of BRM for consideration consisting in part of $1.0 million in cash and the issuance of a $127,000 promissory note. In August 1995, the Company purchased certain assets of Eastern for $1.6 million in cash and the assumption of a non-interest bearing note payable of $252,000 and certain other accounts payable in the amount of $209,000. In January 1996, the Company purchased all the assets of TCD for $4.8 million in cash. In September 1996, the Company purchased all the outstanding stock of MAB for $8.0 million in 25 cash and the issuance of a $1.0 million, five-year convertible note to the principal shareholder of MAB. The note is convertible into the Common Stock of the Company at the initial public offering price and bears interest payable monthly at a rate of 8.0% per annum. The Company financed the cash portion of these acquisitions with bank borrowings. These acquisitions collectively resulted in goodwill estimated at $14.5 million, which is being amortized at approximately $749,000 per year. See "Acquisition History." Cash provided by financing activities was $3.8 million and $280,000 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. Cash used in financing activities was $35,000 and $704,000 in 1994 and 1993, respectively. Bank borrowings have been the Company's primary source of cash from financing activities and have been used for distributions to shareholders and for acquisitions of accounts receivable management companies. The Company borrowed from its bank $4.5 million, $2.4 million and $1.0 million for the six months ended June 30, 1996 and the years 1995 and 1994, respectively. Distributions to shareholders were $752,000, $1.1 million, $813,000 and $658,000 for the six months ended June 30, 1996 and the years 1995, 1994, and 1993, respectively. The Company expects to distribute previously undistributed S Corporation earnings through the Termination Date (which are expected to be approximately $3.0 million) using a portion of the net proceeds of the Offering. See "Use of Proceeds" and "Dividend Policy and Prior S Corporation Status." In July 1995 the Company entered into a revolving credit agreement with Mellon Bank, N.A. which provided for borrowings up to $7.0 million at an interest rate equal to prime plus 1.375%, which was recently increased to $15.0 million, to be utilized for working capital and strategic acquisitions. The current outstanding principal balance under the revolving credit line is $15.0 million. The revolving credit line is collateralized by substantially all the assets of the Company and includes certain financial covenants such as maintaining minimum working capital and net worth requirements and includes restrictions on capital expenditures and distributions to shareholders. The Company has received a commitment letter from its bank to increase the revolving credit facility to $25.0 million and decrease the rate of interest to 2.5% above LIBOR upon completion of the Offering provided that the Company receives minimum net proceeds of $24.0 million from the Offering. In connection with entering into the original revolving credit agreement, the Company recorded deferred charges of approximately $135,000 relating primarily to bank and legal fees. The Company also issued a warrant to the bank exercisable for an aggregate of 175,531 shares of the Company's Common Stock. The warrant expires on July 31, 2005 and is exercisable for nominal consideration. The warrant has been capitalized on the balance sheet as deferred charges and is being amortized over the four-year life of the credit facility. In connection with the expansion of the line of credit in September 1996, the Company recorded deferred charges of $120,000 primarily relating to bank charges and legal fees. In addition, the Company issued an additional warrant to the bank for 46,560 shares of Common Stock. The Company also has agreed to grant an additional warrant to purchase 18,500 shares of Common Stock at an exercise price equal to the initial public offering price in consideration for the increase in the revolving credit facility. In addition to equipment financed under operating leases, capital expenditures were $78,000, $298,000 and $426,000 in 1994, 1995 and the first six months of 1996, respectively. In addition to equipment anticipated to be financed under operating leases, the Company anticipates that capital expenditures will be approximately $1,250,000 and $1,750,000 for 1996 and 1997, respectively, none of which is pursuant to a firm commitment. The Company believes that funds generated from operations, together with existing cash, the net proceeds from the Offering and available borrowings under its revolving credit line will be sufficient to finance its current operations and planned capital expenditure requirements and internal growth at least through 1997. In addition, the Company believes it will have sufficient funds to make selected acquisitions. However, the Company could require additional debt or equity financing if it were to make any significant acquisitions for cash. The Company has no current commitments or agreements with respect to any acquisitions. The Company will account for corporate income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109). On the Termination Date and upon application of SFAS No. 109, a net deferred tax asset of $81,000, representing cumulative temporary differences, was recorded in the financial statements. 26 RECENTLY ISSUED ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, ("SFAS 123") "Accounting for Stock-Based Compensation," which was adopted by the Company January 1, 1996. SFAS 123 affords two acceptable methods to account for stock-based compensation. Companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the company had applied the new method of accounting. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the year of adoption. The Company has elected the disclosure alternative allowed under SFAS 123 and has not recorded expense pursuant to the fair value method. Adoption of the new standard will have no effect on the Company's cash flows. 27 BUSINESS NCO is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company develops and implements customized accounts receivable management solutions for clients' delinquent and current accounts. From eight call centers located in six states, the Company employs advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through efficient utilization of its technology and intensive management of human resources, the Company has achieved rapid growth in recent years. Since April 1994, the Company has made four acquisitions which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including telemarketing, customer service call centers and other outsourced administrative services. The Company believes that it is among the 20 largest accounts receivable management companies in the United States. The Company provides its services principally to educational organizations, financial institutions, healthcare organizations, telecommunications companies, utilities and government entities. In 1995, the Company provided services to such companies as Bell Atlantic Corporation, First Union Corporation, George Washington University Hospital, NationsBank and the University of Pennsylvania. The Company is paid on a contingency or fixed fee basis and seeks to develop long-term relationships with its clients. INDUSTRY BACKGROUND Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many large corporations are recognizing the advantages of outsourcing accounts receivable management. This trend is being driven by a number of industry-specific factors. First, the complexity of accounts receivable management functions in certain industries has increased dramatically in recent years. For example, with the increasing popularity of HMOs and PPOs, healthcare institutions now face the challenge of billing not only large insurance companies but also individuals who are required to pay small, one-time co-payments. Second, changing regulations and increased competition in certain industries such as utilities and telecommunications have created new outsourcing opportunities. Third, the ability to implement cost-effective specialized accounts receivable management, customer support and telemarketing programs has improved dramatically in recent years with the development of sophisticated call and information systems. These programs require substantial capital investment, technical capabilities, human resource commitments and extensive management supervision. The emphasis on cost-effective outsourcing solutions, the increasing sophistication of call center technology and the efficacy of third-party intervention in the recovery process has resulted in the steady growth of the accounts receivable management industry. Based on studies published by the ACA, an industry trade group, it is estimated that receivables referred to third parties for management and recovery in the United States increased from approximately $43.7 billion in 1990 to approximately $79.0 billion in 1994. The leading market segments within the overall accounts receivable management market are healthcare organizations, financial institutions and utilities which represented approximately 43%, 15% and 12%, respectively, or an aggregate of 70%, of total industry referrals in 1994. The accounts receivable management industry is highly fragmented. Based on information obtained from the ACA, there are currently approximately 6,300 accounts receivable management companies in operation, the majority of which are small local businesses. The Company believes that many small accounts receivable management companies have insufficient capital to expand and invest in call center technology and sophisticated workstations and are unable to adequately meet the standards demanded by businesses seeking to outsource their accounts receivable recovery function. In addition, there are a limited number of options for owners of such businesses to obtain liquidity or to sell their businesses. As a result, the Company believes that the industry will experience consolidation in the future and that strategic acquisition opportunities will continue to become available. BUSINESS STRATEGY The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other related teleservices to companies with substantial outsourcing needs. To achieve this goal, the Company's business strategy is based on the following key elements: 28 Efficient Utilization of Technology and Management Infrastructure to Improve Productivity. Efficient use of technology and intensive management of human resources enables the Company to provide cost-effective client solutions and perform large scale accounts receivable management programs. The Company has made a substantial investment in its teleservices infrastructure and is committed to utilizing the best available technologies to achieve operational efficiencies. This investment has enabled the Company to rapidly and efficiently integrate the acquisitions it has made. For example, in the TCD acquisition, the Company was able to reduce the workforce of 148 employees by approximately 40% while maintaining the same revenue base. The Company believes that its infrastructure is capable of supporting additional growth internally or through acquisitions without commensurate increases in costs. Commitment to Client Service. NCO is committed to providing superior service to its clients. The Company works closely with its clients to identify particular needs, design appropriate recovery strategies and implement customized accounts receivable management programs. The Company maintains a client service department to promptly address client issues, assigns dedicated field service representatives to assist larger clients and offers clients the ability to electronically communicate with the Company and monitor operational activity. Offer Low Cost Solutions. The Company seeks to be a low cost provider of accounts receivable management services by centralizing all administrative functions and minimizing overhead at all branch locations. Specifically, the Company has centralized such functions as payment processing, information systems, accounting, sales and marketing and human resources. Target Larger Clients. The Company continues to focus on expanding its base of larger clients while at the same time continuing to pursue mid-size prospects that have traditionally comprised the Company's client base. While the Company's traditional clients have provided a stable revenue base, the Company believes that larger clients offer significant cross-selling opportunities as they continue to outsource more of their accounts receivable management, customer support and telemarketing functions. The Company believes that its size and increasing geographic diversity will help it to obtain larger national clients. GROWTH STRATEGY In light of the increasing volume of accounts receivable referred for third party management, the greater emphasis on the outsourcing of non-core competencies by businesses and the fragmented nature of the industry, the Company believes there are significant opportunities to expand its business. The Company's growth strategy includes the following key elements: Actively Pursue Strategic Acquisitions. The Company intends to take advantage of the fragmented nature of the accounts receivable management industry, along with opportunities in related industries, by making strategic acquisitions. Through selected acquisitions, the Company will seek to serve new geographic markets or industries, expand its presence in its existing vertical markets or add complementary service applications. For example, through the MAB acquisition, management believes that the Company will be able to further its penetration of the education market and expand its presence in the financial services market in the Midwest and Southern regions of the United States. The Company evaluates acquisitions using numerous criteria including size, management strength, service quality, industry focus, diversification of client base, operating characteristics and the ability to integrate the acquired businesses into the Company's operations and eliminate redundant costs. Increase Market Penetration. The Company believes that its long-standing reputation as a quality provider of cost-effective accounts receivable management services is one of its most significant competitive advantages and intends to continue to build upon its reputation. The Company continually strives to increase its share of its clients' accounts receivable management business and to obtain new clients that have outsourced or are seeking to outsource these services. In particular, the Company will continue to focus on the education, financial services, healthcare, telecommunications and utilities industries. These industries include many large corporations which rely heavily on third-party providers for a substantial portion of their accounts receivable management needs. In addition, the Company believes there is significant opportunity for growth in certain new market segments, such as the retail credit card and insurance industries, in which it can leverage its accumulated business expertise and call center infrastructure. 29 Expand Service Offerings. The Company regularly seeks to leverage its infrastructure by expanding the array of services offered to clients by cross-selling existing services and by developing new value-added services that strengthen its long-term relationship with existing clients. For example, the Company has already begun providing other outsourced administrative services such as customer service call centers, telemarketing, telephone-based auditing and other administrative services outsourcing. Substantially all of these services are presently provided to clients who utilize NCO's accounts receivable management services; however, in the future, the Company plans to market these services to both existing and new clients. ACCOUNTS RECEIVABLE MANAGEMENT SERVICES The Company provides a wide range of accounts receivable management services to its clients utilizing an extensive teleservices infrastructure. Although most of the Company's accounts receivable management services to date have focused on recovery of traditional delinquent accounts, the Company does engage in the recovery of current receivables and early stage delinquencies. The Company generates substantially all of its revenue from the recovery of delinquent accounts receivable on a contingency fee basis. In addition, the Company generates revenue from fixed fees for certain accounts receivable management and other related services. Contingency fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients, but can range from 6% for the management of accounts placed early in the accounts receivable cycle to 50% for accounts which have been serviced extensively by the client or by third-party providers. Recovery activities typically include the following: Management Planning. The Company's approach to accounts receivable management for each client is determined by a number of factors including account size and demographics, the client's specific requirements and management's estimate of the collectability of the account. The Company has developed a library of standard processes for accounts receivable management which is based upon its accumulated experience. The Company will integrate these processes with its client's requirements to create a customized recovery solution. In many instances, the approach will evolve and change as the relationship with the client develops and both parties evaluate the most effective means of recovering accounts receivable. The Company's standard approach, which may be tailored to the specialized requirements of its clients, defines and controls the steps that will be undertaken by the Company on behalf of the client and the manner in which data will be reported to the client. Through its systemized approach to accounts receivable management, the Company removes most decision making from the recovery staff and ensures uniform, cost-effective performance. Once the approach has been defined, the Company electronically or manually transfers pertinent client data into its information system. Once the client's records have been established in the Company's system, the Company commences the recovery process. Skip Tracing. In cases where the customer's telephone number or address is unknown, the Company systematically searches the United States Post Office National Change of Address service, consumer data bases, electronic telephone directories, credit agency reports, tax assessor and voter registration records, motor vehicle registrations, military records and other sources. The geographic expansion of banks, credit card companies, national and regional telecommunications companies and managed healthcare providers along with the mobility of consumers has increased the demand for locating the client's customers. Once the Company has located the customer, the notification process can begin. Account Notification. The Company initiates the recovery process by forwarding an initial letter which is designed to seek payment of the amount due or open a dialogue with customers who cannot afford to pay at the current time. This letter also serves as an official notification to each customer of their rights as required by the federal Fair Debt Collection Practices Act. The Company continues the recovery process with a series of mail and telephone notifications. Telephone representatives remind the customer of their obligation, inform them that their account has been placed for collection with the Company and begin a dialogue to develop a payment program. Credit Reporting. At a client's request, the Company will electronically report delinquent accounts to one or more of the national credit bureaus where it will remain for a period of up to seven years. The denial of future credit often motivates the payment of all past due accounts. 30 Litigation Management. When account balances are sufficient, the Company will also coordinate litigation undertaken by a nationwide network of attorneys that the Company utilizes on a routine basis. Typically, account balances must be in excess of $1,000 to warrant litigation and the client is asked to advance legal costs such as filing fees and court costs. Attorneys are generally compensated on a contingency fee basis. The Company's Collection Support staff manages the Company's attorney relationships and facilitates the transfer of all necessary documentation. Payment Process. After the Company receives payment from the customer, it either remits the amount received net of its fee to the client or remits the entire amount received to the client and bills the client for its services. Activity Reports. Clients are provided with a system-generated set of standardized or customized reports that fully describes all account activity and current status. These reports are typically generated monthly, however, the information included in the report and the frequency that the reports are generated can be modified to meet the needs of the client. Quality Tracking. The Company emphasizes quality control throughout all phases of the accounts receivable management process. Some clients may specify an enhanced level of supervisory review and others may request customized quality reports. Large national credit grantors will typically have exacting performance standards which require sophisticated capabilities such as documented complaint tracking and specialized software to track quality metrics to facilitate the comparison of the Company's performance to that of its peers. OTHER SERVICES The Company selectively provides other related services which complement its traditional accounts receivable management business and which leverage its teleservices infrastructure. The Company believes that the following services will provide additional growth opportunities for the Company. Telemarketing. The Company provides telemarketing services for clients, including lead generation and qualification and the actual booking of appointments for a client's sales representatives. Customer Service Call Center. The Company utilizes its communications and information system infrastructure to supplement or replace the customer service function of its clients. For example, the Company is currently engaged by PECO Energy Company, a regional utility, to function as its customer service department to field and respond to calls concerning new services which the utility is beginning to develop and offer. In this manner, the utility can focus on developing these services without investing the resources to build the in-house infrastructure necessary to respond to customer inquiries. Accounts Receivable Outsourcing. The Company complements existing service lines by offering adjunct billing services to clients as an outsourcing option. Additionally, the Company can assist healthcare clients in the billing and management of third party insurance. Custom Designed Business Applications. The Company has the ability to provide outsourced administrative and other back-office responsibilities currently conducted by its clients. For example, the Company was recently engaged by United Healthcare, a national health insurer, to assume all administrative operations for its COBRA and individual conversion coverage, including all responsibility for premium billing and payment processing, customer service call center and policy fulfillment. The Company also was engaged by Independence Blue Cross to audit its base of small business employer accounts to determine if individuals insured through these accounts were, in fact, employees. OPERATIONS Technology and Infrastructure. Over the past five years, the Company has made a substantial investment in its call management systems such as predictive dialers, automated call distribution systems, digital switching and customized computer software. As a result, the Company believes it is able to address accounts receivable management activities more reliably and more efficiently than many other accounts receivable management companies. The Company's systems also permit network access to enable clients to electronically communicate with NCO and monitor operational activity on a real-time basis. 31 NCO provides its accounts receivable management services through the operation of eight state-of-the-art call centers which are electronically linked through the MFS Datanet ATM Network. The Company utilizes two Unix-based NCR 3455 computers which provide necessary redundancy (either computer can operate the system in the event of the failure of the other) and excess capacity for future growth. The computers are linked via network servers to the Company's 689 workstations which consist of personal computers and terminals that are linked to the microcomputers but do not have separate processors. The Company maintains a predictive dialer at each of its Blue Bell, Pennsylvania and Cleveland, Ohio facilities to address its low balance, high volume accounts. These systems scan the Company's database and simultaneously initiate calls on all available telephone lines and determine if a live connection is made. Upon determining that a live connection has been made, the computer immediately switches the call to an available representative and instantaneously displays the associated account record on the representative's workstation. Calls that reach other signals, such as a busy signal, telephone company intercept or no answer, are tagged for statistical analysis and placed in priority recall queues or multiple-pass calling cycles. The system also automates virtually all recordkeeping and follow-up activities including letter and report generation. The Company's automated method of operations dramatically improves the productivity of the Company's collection staff. The Company employs an eight person MIS staff led by a Vice President - Chief Information Officer. The Company maintains disaster recovery contingency plans and has implemented procedures to protect the loss of data against power loss, fire and other casualty. The Company has implemented a security system to protect the integrity and confidentiality of its computer system and data and maintains comprehensive business interruption and critical systems insurance on its telecommunications and computer systems. Quality Assurance and Client Service. The Company's reputation for quality service is critical to acquiring and retaining clients. Therefore, the Company and its clients monitor the Company's representatives for strict compliance with the clients' specifications and the Company's policies. The Company regularly measures the quality of its services by capturing and reviewing such information as the amount of time spent talking with clients' customers, level of customer complaints and operating performance. In order to provide ongoing improvement to the Company's telephone representatives' performance and to assure compliance with the Company's policies and standards, quality assurance personnel monitor each telephone representative on a frequent basis and provide ongoing training to the representative based on this review. The Company's information systems enable it to provide clients with reports on a real-time basis as to the status of their accounts and clients can choose to network with the Company's computer system to access such information directly. The Company maintains a client service department to promptly address client issues and questions and alert senior executives of potential problems that require their attention. In addition to addressing specific issues, a team of client service representatives will contact accounts on a regular basis in order to establish a close client rapport, determine the client's overall level of satisfaction and identify practical methods of improving the client's satisfaction. CLIENT RELATIONSHIPS The Company's client base currently includes over 5,000 companies in such industries as education, financial services, healthcare, telecommunications and utilities. The Company's 10 largest clients in 1995 accounted for approximately 34.9% of the Company's revenue on a pro forma basis. In 1995, the City of Philadelphia Water Revenue Bureau accounted for 5.2% of total revenue on a pro forma basis and 14.1% on an actual basis. No other customer accounted for more than 10% of the Company's actual revenue in 1995. In 1995, the Company on a pro forma basis derived 31.2% of its referrals from educational organizations, 21.3% from financial institutions, 19.7% from healthcare organizations, 11.7% from telecommunications companies, 6.7% from utilities and 5.3% from government entities. 32 The following table sets forth a list of certain of the Company's key clients:
Financial Services Healthcare Education -------------------------- ----------------------------------- -------------------------------- First Union Corporation Reimbursement Technologies, Inc. Pennsylvania Higher Education Mellon Bank. N.A. Medical Center of Delaware Assistance Agency NationsBank, N.A. Franciscan Healthcare University of Pennsylvania The Progressive George Washington University Seton Hall University Corporation Hospital Penn State University United Healthcare Hutchinson Hospital Corporation Rutgers University University of Virginia Telecommunications Utilities Government ---------------------------- ---------------------------------- ----------------------------- Bell Atlantic Corporation New York State Electric & Gas Water Revenue Bureau, City NYNEX National Fuel Gas Distribution of Philadelphia ATX Telecommunications Corporation State of New Jersey Motor Frontier Cellular PECO Energy Company Vehicle Services Boston Edison Company Western Resources Corporation
The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to the Company prior to the date of termination, thus providing the Company with an ongoing stream of revenue from such accounts which diminish over time. Under the terms of the Company's contracts, clients are not required to place accounts with the Company but do so on a discretionary basis. SALES AND MARKETING The Company utilizes a focused and highly professional direct selling effort in which sales representatives personally cultivate relationships with prospects and existing clients. The Company's sales effort consists of a 23 person direct sales force. Each sales representative is charged with identifying leads, qualifying prospects and closing sales. When appropriate, Company operating personnel will join in the sales effort to provide detailed information and advice regarding the Company's operational capabilities. Sales and operating personnel also work together to take advantage of potential cross-selling opportunities. The Company supplements its direct sales effort with print media and attendance at trade shows. Many of the Company's prospective clients issue requests-for-proposals ("RFPs") as part of the contract award process. The Company retains a technical writer for the purpose of preparing detailed, professional responses to RFPs. In addition, the effect of the Company's direct sales force in maintaining contact with the prospective client often allow them to serve in an informal advisory capacity to the prospective client with respect to the requirements of the RFP which the Company believes gives it a competitive edge in responding to the RFP. PERSONNEL AND TRAINING The Company's success in recruiting, hiring and training a large number of employees is critical to its ability to provide high quality accounts receivable management, customer support and teleservices programs to its clients. The Company seeks to hire personnel with previous experience in accounts receivable management or as a telephone representative. NCO generally offers competitive compensation and benefits and offers promotion opportunities within the Company. All Company personnel receive a comprehensive training course that consists of a combination of classroom and practical experience. Prior to customer contact, new employees receive one week of training in the Company's operating systems, procedures and telephone techniques and instruction in applicable federal and state regulatory requirements. Company personnel also receive a wide variety of continuing professional education consisting of both classroom and role playing sessions. 33 As of June 30, 1996, the Company (including MAB) had a total of 577 full-time employees and 91 part- time employees, of which 547 were telephone representatives. None of the Company's employees is represented by a labor union. The Company believes that its relations with its employees are good. COMPETITION The accounts receivable management industry is highly competitive. The Company competes with approximately 6,300 providers, including large national corporations such as First Data Corporation, Payco American Corporation, CRW Financial, Inc. and Union Corporation, and many regional and local firms. Many of the Company's competitors have substantially greater resources, offer more diversified services and operate in broader geographic areas than the Company. In addition, the accounts receivable management services offered by the Company, in many instances, are performed in-house. Moreover, many larger clients retain multiple accounts receivable management and recovery providers which exposes the Company to continuous competition in order to remain a preferred vendor. The Company believes that the primary competitive factors in obtaining and retaining clients are the ability to provide customized solutions to a client's requirements, personalized service, sophisticated call and information systems and price. The Company also competes with other firms, such as SITEL Corporation, APAC TeleServices, Inc. and Teletech Holdings, Inc., in providing teleservices. REGULATION The accounts receivable management industry is regulated both at the federal and state level. The federal Fair Debt Collection Practices Act (the "FDCPA") regulates any person who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. The FDCPA establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. Further, it prohibits harassment or abuse by debt collectors, including the threat of violence or criminal prosecution, obscene language or repeated telephone calls made with the intent to abuse or harass. The FDCPA also places restrictions on communications with individuals other than consumer debtors in connection with the collection of any consumer debt and sets forth specific procedures to be followed when communicating with such third parties for purposes of obtaining location information about the consumer. Additionally, the FDCPA contains various notice and disclosure requirements and prohibits unfair or misleading representations by debt collectors. The Company is also subject to the Fair Credit Reporting Act which regulates the consumer credit reporting industry and which may impose liability on the Company to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The accounts receivable management business is also subject to state regulation. Some states require that the Company be licensed as a debt collection company. Management believes that the Company currently holds applicable licenses from all states where required. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing. For example, some states have enacted restrictions similar to the federal TCPA. From time to time, Congress and the states consider legislation that would further regulate the Company's telemarketing operations and the Company cannot predict whether additional legislation will be enacted and, if enacted, what effect it would have on the telemarketing industry and the Company's business. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. 34 The Company devotes significant and continuous efforts, through training of personnel and monitoring of compliance, to ensure that it is in compliance with all federal and state regulatory requirements. The Company believes that it is in material compliance with all such regulatory requirements. FACILITIES The Company operates eight leased facilities. The chart below summarizes the Company's facilities: Location Approximate of Facility Square Footage Function ---------------- -------------- ------------------------------------------- Denver, CO 4,800 Processing center Hutchinson, KS 900 Processing center Wichita, KS 10,000 Processing center Beltsville, MD 4,700 Processing center Buffalo, NY 30,000 Processing center Cleveland, OH 7,000 Processing center Blue Bell, PA 36,500 Corporate headquarters and processing center Philadelphia, PA 5,700 Processing center The leases of these facilities expire between 1997 and 2010, and most contain renewal options. The Company believes that these facilities are adequate for its current operations, but additional facilities may be required to support growth. The Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms. In addition, the Company leases sales offices in Birmingham, Alabama and Canton, Massachussetts. The Company leases space in four buildings in Blue Bell, Pennsylvania from three limited partnerships of which the existing shareholders of the Company are limited partners and Michael J. Barrist is the sole shareholder of the corporate general partners, pursuant to leases expiring between 1998 and 2000. See "Management -- Certain Transactions -- Leases." LEGAL PROCEEDINGS The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management believes that none of these legal proceedings will have a materially adverse effect on the financial condition or results of operations of the Company. 35 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the Company's directors, executive officers, certain key employees and persons who will become directors of the Company following the consummation of the Offering: Name Age Position --------------------- ----- -------------------------------------- Michael J. Barrist .. 35 Chairman of the Board, President and Chief Executive Officer Charles C. Piola, Jr. . 49 Executive Vice President and Director Bernard R. Miller ... 49 Senior Vice President, Development and Director Steven L. Winokur ... 37 Vice President, Finance and Chief Financial Officer Joseph C. McGowan ... 43 Vice President, Operations Stephen Elliott ..... 35 Vice President, Technology and Chief Information Officer Steven Leckerman .... 44 Vice President, Collection Operations Eric S. Siegel ...... 40 Director Allen F. Wise ....... 54 Director Michael J. Barrist has served as Chairman of the Board, President and Chief Executive Officer of NCO since purchasing the Company in 1986. Mr. Barrist was employed by U.S. Healthcare Inc. from 1984 to 1986, most recently as Vice President of Operations, and was employed by Gross & Company, a certified public accounting firm, from 1980 through 1984. Mr. Barrist is a certified public accountant. Charles C. Piola, Jr. joined the Company in 1986 as Executive Vice President, Sales and Marketing and has served as a director since that time. Prior to joining NCO, Mr. Piola was the Regional Sales Manager for Trans World Systems from 1983 to 1986 and IC Systems from 1979 to 1981, both accounts receivable management companies. Bernard R. Miller joined the Company as Senior Vice President of Development in 1994 when NCO acquired BRM, a Philadelphia-based accounts receivable management company owned principally by Mr. Miller. Mr. Miller became a director in 1996. Prior to joining the Company, Mr. Miller served as President and Chief Executive Officer of BRM since he founded it in 1980. Steven L. Winokur joined the Company in December 1995 as Vice President, Finance and Chief Financial Officer. Prior to that, Mr. Winokur acted as a part-time consultant to the Company since 1986. From February 1992 to December 1995, Mr. Winokur was the principal of Winokur & Associates, a certified public accounting firm. From March 1981 to February 1992, Mr. Winokur was a partner with Gross & Company, a certified public accounting firm, where he most recently served as Administrative Partner. Mr. Winokur is a certified public accountant. Joseph C. McGowan joined the Company in 1990 as Vice President, Operations. Prior to that, Mr. McGowan was Assistant Manager of the Collections Department at Philadelphia Gas Works, a public utility, since 1975. Stephen Elliott joined the Company in May 1996 as Vice President, Technology and Chief Information Officer and provided consulting services to the Company since May 1995. Prior to joining NCO, Mr. Elliott was employed by Electronic Data Systems, a computer services company, since 1986, most recently as Senior Account Manager. 36 Steven Leckerman joined the Company in September 1995 as Vice President, Collection Operations. From 1982 to September 1995, Mr. Leckerman was employed by Allied Bond Corporation, a division of Union Corporation, an accounts receivable management company, where he served as manager of dialer and special projects. Eric S. Siegel will become a director of the Company after the consummation of the Offering. Mr. Siegel has been president of Siegel Management Company, a management consulting firm, since 1983. Allen F. Wise will become a director of the Company after the consummation of the Offering. Mr. Wise became Chief Executive Officer of Coventry Healthcare, a managed care company, in October 1996. Prior thereto, he was Executive Vice President of United Healthcare Corporation since October 1994, President of Wise Health Systems, a healthcare management company, from September 1993 to October 1994, Chief Executive Officer of Keystone Health Plan and Chief Operating Officer of Independence Blue Cross from September 1991 to September 1993 and Vice President of US Healthcare, Inc. from April 1985 to September 1991. BOARD OF DIRECTORS Within 90 days after completion of this Offering, the Company will expand its Board of Directors from three to five members and will appoint two independent directors to fill the vacancies created by the increase. The Board will be divided into three classes: Class I will consist of Mr. Barrist, whose term will expire at the 1997 annual meeting of shareholders; Class II will consist of Messrs. Miller and Wise, whose terms will expire at the 1998 annual meeting of shareholders; Class III will consist of Messrs. Piola and Siegel, whose terms will expire at the 1999 annual meeting of shareholders. Beginning with the 1997 annual meeting of shareholders, directors whose terms are expiring will be elected by the shareholders to serve for three year terms. The Company will also establish an Audit Committee consisting of Messrs. Siegel and Wise, and a Compensation Committee consisting of Messrs. Barrist, Siegel and Wise. Audit Committee. The Audit Committee will make recommendations concerning the engagement of independent public accountants; review with the independent public accountants the plans for and scope of the audit, the audit procedures to be utilized and the results of the audit; approve the professional services provided by the independent public accountants; review the independence of the independent public accountants; and review the adequacy and effectiveness of the Company's internal accounting controls. Compensation Committee. The Compensation Committee will make recommendations to the Board of Directors concerning compensation for the Company's executive officers; review general compensation levels for other employees as a group; administer the Company's 1995 Stock Option Plan and 1996 Stock Option Plan; and take such other actions as may be required in connection with the Company's compensation and incentive plans. DIRECTOR COMPENSATION The Company previously has not paid fees to its directors for their services as directors. Upon completion of this Offering, each non-employee director of the Company will receive an annual fee of $5,000 and a fee of $500 for each meeting of the Board or Board committee attended, plus reimbursement of expenses incurred in attending meetings; however, no additional fee will be paid for committee meetings held the same day as Board meetings. Non-employee directors will receive stock options pursuant to the Company's 1996 Non-Employee Director Stock Option Plan and directors who are also employees are eligible to participate in the Company's 1996 Stock Option Plan. See "--Stock Option Plans". EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth the compensation earned by the Chief Executive Officer and the three next most highly compensated executive officers of the Company whose aggregate salaries and bonuses exceeded $100,000 (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during 1995. 37 SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards (1) ------------------------ -------------- Securities All Other Name and Underlying Compensation Principal Position Year Salary Bonus Options (#) (2) ----------------------------- ------ ---------- ---------- -------------- -------------- Michael J. Barrist .......... 1995 $200,000 $242,641 -- $ 5,993 Chairman of the Board, President and Chief Executive Officer Charles C. Piola, Jr. ....... 1995 200,000 135,714 -- 15,835 Executive Vice President and Director Bernard R. Miller ........... 1995 130,000 21,645 -- 5,955 Senior Vice President, Development Joseph C. McGowan ........... 1995 100,000 30,000 44,344 5,088 Vice President, Operations
- ------ (1) The Company did not grant any restricted stock awards or stock appreciation rights or make any long-term incentive plan payouts during 1995. (2) Consists of premiums for disability policies paid by the Company of $3,493, $13,335, $4,197 and $3,695 and the Company matching contribution under the 401(k) Profit Sharing Plan of $2,500, $2,500, $1,758 and $1,393 for the benefit of Messrs. Barrist, Piola, Miller and McGowan, respectively. 1995 Option Grants Table. The following table sets forth certain information concerning stock options granted during 1995 to each of the Named Executive Officers. OPTION GRANTS IN 1995
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation For Individual Grants Option Term (1) -------------------------------------------------------------------- ------------------------- Number of Percent of Securities Total Options Underlying Granted to Exercise Options Employees In Price Per Expiration Name Granted Fiscal Year Share Date 5% 10% -------------------------- -------------- ----------------- ------------- -------------- ---------- ----------- Michael J. Barrist ....... -- -- -- -- -- -- Charles C. Piola, Jr. .... -- -- -- -- -- -- Bernard R. Miller ........ -- -- -- -- -- -- Joseph C. McGowan ........ 44,344 (2) 33.3% $2.73 6/1/05 76,133 192,937
- ------ (1) Represents the difference between the market value of the Common Stock for which the option may be exercised, assuming that the market value of the Common Stock on the date of grant appreciates in value to the end of the ten-year option term at annualized rates of 5% and 10%, respectively, and the exercise price of the option. The potential realizable value of the options based on the assumed initial public offering price of $12.00 per share will substantially exceed the potential realizable values shown in the table. (2) The options were granted on June 1, 1995 and become exercisable in three equal annual installments beginning one year after the date of grant. 38 Aggregated Option Exercises in 1995 and 1995 Year-End Option Values Table. The following table sets forth certain information concerning the exercise of options in 1995 and the number of unexercised options and the value of unexercised options at December 31, 1995 held by the Named Executive Officers. AGGREGATED OPTION EXERCISES IN 1995 AND 1995 YEAR-END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at Shares Acquired Value Options at December 31, 1995 December 31, 1995(1) Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable --------------------------------------------- ---------------- -------------------------------- ----------------------------- Michael J. Barrist ....... -- -- -- /-- -- /-- Charles C. Piola, Jr. .... -- -- -- /-- -- /-- Bernard R. Miller ........ 86,881 (2) $854,572 (2) -- /-- -- /-- Joseph C. McGowan ........ -- -- -- /44,344 -- / $411,069
- ------ (1) There was no public trading market for the Common Stock as of December 31, 1995. Accordingly, these values have been calculated on the basis of an assumed initial public offering price of $12.00 per share, less the applicable exercise price. (2) Mr. Miller purchased these shares for an aggregate exercise price of $188,000 pursuant to the exercise of an option issued to him at the time of the BRM acquisition. Because there was no public trading market for the Common Stock as of the date of exercise, the value realized upon exercise of this option was calculated on the basis of an assumed initial public offering price of $12.00 per share, less the exercise price. EMPLOYMENT AGREEMENTS In September 1996, the Company entered into five-year employment agreements with Messrs. Barrist, Piola, Miller, McGowan and Winokur pursuant to which they are entitled to receive annual base salaries of $275,000, $225,000, $150,000, $125,000 and $150,000, respectively, adjusted each year in accordance with the Consumer Price Index. Mr. Barrist is entitled to receive an annual bonus of $50,000 if the Company reaches performance goals determined by the Board of Directors. He is also entitled to a bonus of $100,000 if the Company's net income increases by 20% over the prior year and a bonus equal to 5% of any increase in net income in excess of 20%, in each case adjusted for dilution. Mr. Piola is eligible for an annual bonus of $50,000, $75,000 or $100,000 if the Company's annual increase in net income (adjusted for dilution) over the prior year exceeds 20%, 30% or 40%, respectively. Messrs. Miller, McGowan and Winokur receive such annual bonuses as are determined by the Board of Directors. Each of the employment agreements provides that, in the event of the death of the employee or the termination of employment by the Company other than "for cause" (as defined in the agreements), the Company shall continue to pay the employee's full compensation, including bonuses, for the balance of the employment term. In addition to a non-disclosure covenant, each employment agreement also contains a covenant-not-to compete with the Company for a period of two years following the date that the Company ceases to pay the employee any compensation pursuant to the terms of the agreement. STOCK OPTION PLANS In June 1995, the Company adopted, and the shareholders approved, the Company's 1995 Stock Option Plan (the "1995 Plan"). In September 1996, the Company adopted, and the shareholders approved, the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan" and collectively with the 1995 Plan and the 1996 Plan, the "Plans"). The purpose of the Plans is to attract and retain employees, non-employee directors, and independent consultants and contractors and to provide additional incentive to them by encouraging them to invest in the Common Stock and acquire an increased personal interest in the Company's business. Payment of the exercise price for options granted under the Plans may be made in cash, shares of Common Stock or a combination of both. All options granted pursuant to the Plans are exercisable in accordance with a vesting schedule which is set at the time of the issuance of the option and, except as indicated below, may not be exercised more than ten years from the date of grant. Options granted under the Plans will become immediately exercisable upon a "change in control" as defined in the Plans. 1995 Plan and 1996 Plan. All officers, directors, key employees, independent contractors and independent consultants of the Company or any of its current or future parents or subsidiaries are eligible to receive options 39 under the 1995 Plan and the 1996 Plan. These Plans are administered by the Compensation Committee of the Board of Directors. The Board of Directors may administer these Plans. The committee will select the optionees and will determine the nature of the option granted, the number of shares subject to each option, the option vesting schedule and other terms and conditions of each option. The Board of Directors may amend or supplement these Plans and outstanding options and may suspend or terminate these Plans, provided that such action may not adversely affect outstanding options. The Company has reserved 221,719 shares of Common Stock for issuance upon the exercise of options granted under the 1995 Plan and 218,413 shares of Common Stock for issuance upon the exercise of options granted under the 1996 Plan. Options to purchase an aggregate of 367,321 shares of Common Stock have been issued under the 1995 Plan and the 1996 Plan. Options granted under these Plans may be incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options not intended to so qualify. These Plans require the exercise price of incentive stock options to be at least equal to the fair market value of the Common Stock on the date of the grant. In the case of options granted to a shareholder owning, directly or indirectly, in excess of 10% of the Common Stock, the option exercise price must be at least equal to 110% of the fair market value of the Common Stock on the date of grant and such option may not be exercised more than five years from the date of grant. The option price for non-qualified options, at the discretion of the Compensation Committee, may be less than the fair market value of the Common Stock on the date of grant. All unexercised options terminate three months following the date on which an optionee's employment by, or relationship with, the Company or any parent or subsidiary of the Company, terminates other than by reason of disability or death (but not later than the expiration date) whether or not such termination is voluntary. Any option held by an employee who dies or who ceases to be employed because of disability must be exercised by the employee or his representative within one year after the employee dies or ceases to be an employee (but not later than the scheduled termination date). Options are not transferable except to the decedent's estate in the event of death. No additional options may be granted under the 1995 Plan and no option may be granted under the 1996 Plan after August 2006. In September and October 1996, the Company granted options to purchase an aggregate of 189,946 shares under the 1995 Plan and the 1996 Plan at an exercise price equal to the initial public offering price. Of these options, 63,315 will become exercisable on the first anniversary of the date of grant and the remaining options will become exercisable in equal amounts on the second and third anniversaries of the date of grant. Director Plan. All non-employee directors automatically receive options under the Director Plan. The Director Plan is administered by the Board of Directors of the Company, including non-employee directors, who may modify, amend, suspend or terminate the plan, other than the number of shares with respect to which options are to be granted, the option exercise price, the class of persons eligible to participate, or options previously granted. The Company has reserved 24,258 shares of Common Stock for issuance upon the exercise of options under the Director Plan. Options granted under the Director Plan are not incentive stock options under Section 422 of the Code. Each person who is first elected or appointed to serve as a non-employee director of the Company is automatically granted options to purchase 1,000 shares of Common stock at the fair market value of the Common Stock on the date of the grant. Immediately after the Company's 1997 annual meeting of shareholders and at each annual meeting of shareholders thereafter, each individual who is re-elected or continues as a non- employee director automatically is granted an option to purchase 1,000 shares of Common stock at the fair market value of the Common Stock on the date of the grant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS Prior to the completion of the Offering, the Company did not have a Compensation Committee and compensation decisions were made by Mr. Barrist. Within 90 days after the completion of this Offering, the Company expects to appoint Messrs. Siegel and Wise to the Board and to establish a Compensation Committee consisting of Messrs. Barrist, Siegel and Wise. 40 CERTAIN TRANSACTIONS REAL ESTATE MATTERS The Company currently leases four facilities in Blue Bell, Pennsylvania. These facilities are leased from limited partnerships, in each case the general partner of which is a corporation with Mr. Barrist as the sole shareholder and the limited partners of which are the current shareholders of the Company except that, in certain partnerships, an unaffiliated person is also a limited partner. The leases for the four facilities provide for terms expiring between 1998 and 2005, and provide for total base monthly rent during 1996 of approximately $47,100. Under the facilities leases, the Company paid the limited partnerships controlled by the Company's current shareholders approximately $81,563, $297,500, $385,217, and $282,289 for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996, respectively. At one of the facilities, the Company has sublet the space to an affiliate of the limited partnership owning the facility for a monthly rent of $1,454, which is equal to the monthly rent paid by the Company. While the Company believes that the terms of the leases are no less favorable to the Company than would have been obtained by unaffiliated parties, there can be no assurance that conflicts of interest will not arise in the future with respect to these leases. See "Business -- Facilities" and Note 9 of Notes to the Financial Statements. Any material transactions that may arise in the future with respect to these leases or any other future material transactions between the Company and its directors, executive officers or principal shareholders will be subject to approval by the Company's independent directors and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. . The Company has made interest-free advances to the limited partnerships for the purpose of making improvements to these facilities. The largest aggregate amount of indebtedness outstanding during 1994 and 1995 and the six months ended June 30, 1996 was $64,000, $100,000 and $249,820, respectively. These advances were repaid in June 1996. S CORPORATION DISTRIBUTIONS At the Termination Date, the Company terminated its status as an S Corporation. In connection therewith, the Company declared distributions in an amount equal to the Company's undistributed S Corporation earnings as of the Termination Date, estimated at $3.0 million, subject to adjustment. The Company expects to pay the S Corporation Distributions with a portion of the proceeds from this Offering. See "Use of Proceeds" and "Dividend Policy and Prior S Corporation Status." DISTRIBUTION AND TAX INDEMNIFICATION AGREEMENT The Company has entered into a distribution and tax indemnification agreement with its current shareholders which provides for: (i) the payment of the S Corporation Distributions, (ii) the adjustment of the S Corporation Distributions based on the final determination of the Company's actual undistributed S Corporation earnings through the Termination Date, (iii) an indemnification by the Company of the current shareholders for any losses or liabilities with respect to any additional taxes (including interest, penalties, legal and accounting fees and any additional taxes resulting from any indemnification) resulting from the Company's operations during the period in which it was an S Corporation (the "S Corporation Period") and (iv) an indemnification by the current shareholders of the Company for the amount of any tax refund received by the current shareholders due to a reduction in their share of the Company's S Corporation taxable income for the S Corporation Period less any taxes, interest or penalties imposed by any tax authority on any distributions to the current shareholders with respect to the S Corporation Period in excess of the current shareholder's share of taxable income of the Company for the S Corporation Period. See "Dividend Policy and Prior S Corporation Status." LOAN TO BERNARD R. MILLER In 1995, the Company loaned $135,888 to Bernard R. Miller at an interest rate of 7.0% per year to enable him to exercise an option to purchase 86,881 shares of Common Stock, which option was issued to him in connection with the BRM acquisition. This loan was repaid in May 1996. 41 PROFESSIONAL SERVICES The Company has paid consulting fees of $5,000, $49,000 and $40,000 to Siegel Management Company for 1994, 1995 and 1996, respectively. The Company will pay a fee to Siegel Management Company of $240,000 after the consummation of the Offering for various consulting and advisory services rendered to the Company in connection with the Offering. Eric S. Siegel, who will become a director of the Company after the consummation of the Offering, is the President and owner of Siegel Management Company. In 1996, Mr. Siegel received options to purchase 11,086 shares of Common Stock under the 1995 Plan at an exercise price equal to the initial public offering price. Joshua Gindin is the beneficial owner of approximately 8.2% of the outstanding Common Stock of the Company, principally as a result of serving as trustee or co-trustee of certain trusts which own Common Stock. See "Principal and Selling Shareholders." Mr. Gindin provides legal services to the Company. In 1995, Mr. Gindin also received options to purchase 11,086 shares of Common Stock under the 1995 Plan at an exercise price of $2.73 per share. PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of October 16, 1996, and as adjusted to reflect the sale of the shares of Common Stock offered hereby by: (i) each person known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock; (ii) each of the Company's directors and nominees for director; (iii) each of the Named Executive Officers; and (iv) the Company's directors, nominees for director and executive officers as a group. Except as otherwise indicated, to the knowledge of the Company, the beneficial owners of the Common Stock listed below have sole investment and voting power with respect to such shares.
Beneficial Ownership ----------------------------------------------- Percent After Percent Prior the Offering Name of Beneficial Owner Number to the Offering (1) ----------------------------------------------- ----------- --------------- -------------- Michael J. Barrist (2)(3) ..................... 2,541,338 60.3% 37.9% Annette Barrist (2)(4) ........................ 260,001 6.2 3.9 Charles C. Piola, Jr. (2)(5) .................. 1,180,389 28.0 17.6 Bernard R. Miller (2) ......................... 210,684 5.0 3.1 Eric S. Siegel ................................. - - - Allen F. Wise .................................. - - - Joseph C. McGowan(2)(6) ....................... 14,781 * * Joshua Gindin (7) ............................. 344,923 8.2 5.1 230 South Broad Street 20th Floor Philadelphia, PA 19102 Mellon Bank, N.A. ............................. 222,091 5.0 3.2 610 West Germantown Pike Suite 200 Plymouth Meeting, PA 19462 All directors, nominees for director and executive officers as a group (7 persons) (8) .............................. 4,098,796 96.7% 60.8%
- ------ *Less than one percent. (1) Assumes no exercise of the Underwriters' over-allotment option. In the event that the Underwriters' over- allotment option is exercised in full, Messrs. Barrist, Piola and Miller and Mrs. Barrist have agreed to sell 210,188, 117,562, 18,750 and 28,500 shares, respectively, and after the Offering will beneficially own 34.7%, 15.8%, 2.9% and 3.4%, respectively, and all directors and executive officers as a group will beneficially own 55.3% of the outstanding Common Stock. (2) The address of such person is c/o NCO Group, Inc., 1740 Walton Road, Blue Bell, Pennsylvania 19422-0987. (3) Includes: (i) 260,001 shares of Common Stock owned by Mrs. Barrist which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy and (ii) 60,192 shares held in trust for the benefit of members of Mrs. Barrist's family for which Mr. Barrist is a co-trustee. Excludes 140,518 shares held in trust for the benefit of Mr. Barrist's child, as to which Mr. Barrist disclaims beneficial ownership. Mrs. Barrist is the mother of Michael J. Barrist. 42 (4) Excludes 60,192 shares held in trust for the benefit of members of Mrs. Barrist's family, as to which Mrs. Barrist disclaims beneficial ownership. Mrs. Barrist is the mother of Michael J. Barrist. (5) Excludes 140,518 shares held in trust for the benefit of Mr. Piola's children, as to which Mr. Piola disclaims beneficial ownership. (6) Represents 14,781 shares issuable upon exercise of options which are exercisable within 60 days of October 16, 1996. (7) Includes (i) 140,518 shares held in trust for the benefit of Mr. Barrist's child for which Mr. Gindin is a co-trustee, (ii) 60,192 shares held in trust for the benefit of Mrs. Barrist's family for which Mr. Gindin is a co-trustee, (iii) 140,518 shares held in trust for the benefit of Mr. Piola's children for which Mr. Gindin is trustee and (iv) 3,695 shares issuable upon the exercise of options which are exercisable within 60 days of October 16, 1996. (8) Includes: (i) 260,001 shares of Common Stock owned by Mrs. Barrist which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy, (ii) 60,192 shares held in trust for the benefit of members of Mrs. Barrist's family for which Mr. Barrist is a co-trustee, (iii) 140,518 shares held in trust for the benefit of Mr. Barrist's child for which an executive officer of the Company is a co-trustee and (iv) an aggregate of 25,867 shares issuable upon exercise of options which are exercisable within 60 days of October 16, 1996. DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 25,000,000 shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par value, issuable in series, the relative rights, limitations and preferences of which may be designated by the Board of Directors ("Preferred Stock"). As of the date of this Prospectus, 4,213,447 shares of Common Stock were issued and outstanding and held of record by five shareholders and no shares of Preferred Stock were outstanding. COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by shareholders. Subject to preferences that may be applicable to any then outstanding Preferred Stock, the holders of Common Stock are entitled, among other things, (i) to share ratably in dividends if, when and as declared by the Board of Directors out of funds legally available therefor; and (ii) in the event of liquidation, dissolution or winding-up of the Company, to share ratably in the distribution of assets legally available therefor, after payment of debts and expenses. The holders of Common Stock do not have cumulative voting rights in the election of directors and have no preemptive rights to subscribe for additional shares of capital stock of the Company. All currently outstanding shares of the Common Stock are, and the shares offered hereby, when sold in the manner contemplated by this Prospectus will be, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to the terms of any series of Preferred Stock which the Company may issue in the future. PREFERRED STOCK The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Articles and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares, to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the shareholders. The Company has no current plans to issue any shares of Preferred Stock. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares 43 of the Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. WARRANTS AND CONVERTIBLE NOTE In July 1995, the Company issued a warrant (the "1995 Warrant") to purchase 175,531 shares of Common Stock to Mellon Bank, N.A. pursuant to the Company's Credit Agreement. The Company issued a warrant (the "1996 Warrant") to purchase an additional 46,560 shares of Common Stock to Mellon Bank, N.A. upon the amendment of the Credit Agreement in September 1996. The 1995 Warrant is exercisable at any time after the consummation of this Offering and prior to July 31, 2005 at a nominal exercise price. The Company has agreed to grant an additional warrant to purchase 18,500 shares of Common Stock at an exercise per share price equal to the initial public offering price in consideration of increasing the revolving credit facility to $25.0 million. The 1996 Warrant is exercisable at any time after the consummation of the Offering and prior to July 31, 2005 at an exercise price equal to the initial public offering price of the Common Stock. The number of shares of Common Stock which may be acquired upon exercise of the 1995 Warrant and the 1996 Warrant (collectively, the "Warrants") and the exercise price are each subject to adjustment in certain circumstances, including the sale by the Company of Common Stock at a price per share less than the then current fair market value of the Common Stock. The holder of the Warrants also has the right to surrender the Warrants in exchange for shares of Common Stock having an aggregate fair market value equal to the amount by which the aggregate fair market value of all of the shares issuable upon exercise of the Warrants exceeds the aggregate exercise price of the Warrants. In connection with the Credit Agreement, the Company entered into a Registration Rights Agreement granting Mellon Bank, N.A. and its transferees (collectively, "Holders") the right to register the shares received upon exercise of the Warrants under the Securities Act. Whenever the Company proposes to register any shares of Common Stock at any time prior to July 31, 2005, the Company is required to give notice to the Holders of the proposed registration and to include their shares in such registrations, subject to certain conditions including the right of the underwriters of such offering to limit the number of shares sold by the Holders if, in the underwriters' opinion, the number of securities requested to be included in such registration exceeds the number which can be sold without adversely affecting the marketability of the offering. The Holders may also require the Company to file up to two registration statements under the Securities Act with respect to such shares. The Company is required to pay all registration expenses (other than underwriting discounts), including the reasonable fees of one counsel chosen by the Holders. The Holders have agreed to waive any rights to register shares of Common Stock in this Offering. As part of the purchase price for the MAB acquisition, the Company issued a $1.0 million Convertible Note which is convertible into shares of Common Stock at the initial public offering price at any time prior to maturity in September 2001. ANTI-TAKEOVER PROVISIONS The Company's Articles and Bylaws contain several provisions intended to limit the possibility of, or make more difficult, a takeover of the Company. In addition to providing for a classified Board of Directors and the issuance of Preferred Stock having terms established by the Board of Directors without shareholder approval, the Articles provide that: (i) at least 65% of the votes entitled to be cast by shareholders is required to approve amendments to the Articles and Bylaws, unless at least a majority of the incumbent directors on the Board of Directors has voted in favor of the amendment, in which case only a majority of the votes cast by shareholders is required to approve the amendment, (ii) directors can be removed only for cause and only by a vote of at least 65% of the votes entitled to be cast by shareholders, and (iii) the shareholders of the Company are not entitled to call special meetings of the shareholders. In addition, the Articles provide that actions by shareholders without a meeting must receive the unanimous written consent of all shareholders. The Articles also permit the Board 44 of Directors to oppose, in its sole discretion, a tender offer or other offer for the Company's securities and to take into consideration all pertinent issues. Should the Board of Directors determine to reject such an offer, it may take any lawful action to accomplish its purpose, including, among other things, advising shareholders not to accept the offer and commencing litigation against the offeror. The Company's Bylaws establish procedures for the nomination of directors by shareholders and the proposal by shareholders of matters to be considered at meetings of the shareholders, including the submission of certain information within the times prescribed in the Bylaws. In addition, under the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), subject to certain exceptions, a business combination between a Pennsylvania corporation and a person owning 20% or more of such corporation's voting stock (an "interested person") may be accomplished only if: (i) the business combination is approved by the corporation's directors prior to the date on which such person acquired 20% or more of such stock or if the board approved such person's acquisition of 20% or more of such stock prior to such acquisition; (ii) the interested person owns shares entitled to cast at least 80% of the votes all shareholders would be entitled to cast in the election of directors, the business combination is approved by the vote of shareholders entitled to cast a majority of votes that all stockholders would be entitled to cast in an election of directors (excluding shares held by the interested person), which vote may occur no earlier than three months after the interested person acquired its 80% ownership, and the consideration received by shareholders in the business combination satisfies certain minimum conditions; (iii) the business combination is approved by the affirmative vote of all outstanding shares of common stock; or (iv) the business combination is approved by the vote of shareholders entitled to cast a majority of the votes that all shareholders would be entitled to cast in the election of directors (excluding shares held by the interested person), which vote may occur no earlier than five years after the interested person became an interested person. A corporation may exempt itself from this provision by an amendment to its articles of incorporation that requires shareholder approval. The Articles do not provide an exemption from this provision. Pennsylvania has also adopted other anti-takeover legislation from which the Company has elected to exempt itself in the Articles. The BCL also provides that the directors of a corporation, in making decisions concerning takeovers or any other matters, may consider, to the extent that they deem appropriate, among other things, (i) the effects of any proposed transaction upon any or all groups affected by such action, including, among others, shareholders, employees, suppliers, customers and creditors, (ii) the short-term and long-term interests of the corporation and (iii) the resources, intent and conduct of the person seeking control. The existence of the foregoing provisions of the Articles, Bylaws and BCL may discourage other persons or companies from making a tender offer for, or seeking to acquire, substantial amounts of the Company's Common Stock. LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION As permitted by the BCL, the Company's Bylaws provide that a director shall not be personally liable in such capacity for monetary damages for any action taken, or any failure to take any action, unless the director breaches or fails to perform the duties of his or her office under the BCL, and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. These provisions of the Bylaws, however, do not apply to the responsibility or liability of a director pursuant to any criminal statute, or to the liability of a director for the payment of taxes pursuant to local, Pennsylvania or federal law. These provisions offer persons who serve on the Board of Directors of the Company protection against awards of monetary damages for negligence in the performance of their duties. The Bylaws also provide that every person who is or was a director or executive officer of the Company, or of any corporation which he served as such at the request of the Company, shall be indemnified by the Company to the fullest extent permitted by law against all expenses and liabilities reasonably incurred by or imposed upon him, in connection with any proceeding to which he may be made, or threatened to be made, a party, or in which he may become involved by reason of his being or having been a director or executive officer of the Company, or of such other corporation, whether or not he is a director or executive officer of the Company or such other corporation at the time the expenses or liabilities are incurred. No indemnification shall be provided, however, with respect to: liabilities arising under Section 16(b) of the Securities Exchange Act of 1934, as 45 amended, if a final unappealable judgment or award establishes that such officer or director engaged in self- dealing, willful misconduct or recklessness, for expenses or liabilities which have been paid directly to, or for the benefit of, such person by an insurance carrier or for amounts paid in settlement of actions without the written consent of the Board of Directors. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Mellon Bank, N.A., Philadelphia, Pennsylvania. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have an aggregate of 6,713,447 shares of Common Stock outstanding. Of these shares, the 2,500,000 shares of Common Stock sold in this Offering will be freely tradeable without restriction or further registration under the Securities Act of 1933 (the "Securities Act") unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 4,213,447 shares of outstanding Common Stock will be "restricted securities", as that term is defined in Rule 144 ("Restricted Shares"), and may be sold only in accordance with an exemption from registration, such as the exemption provided by Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (approximately 67,134 shares immediately after the Offering) or (ii) the average weekly trading volume of the Common Stock in the over-the-counter market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements, and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares under Rule 144(k) without regard to the requirements described above. Rule 144 also provides that affiliates of the Company who are selling shares that are not Restricted Shares must nonetheless comply with the same restrictions applicable to Restricted Shares with the exception of the holding period requirement. The Securities and Exchange Commission has published a notice of rule-making that, if adopted as proposed, would shorten the two-year holding period under Rule 144 to one year and would shorten the three-year holding period under Rule 144(k) to two years. The Company cannot predict whether such amendments will be adopted. The Company's directors, executive officers and existing shareholders have agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. Following the expiration of this 180-day period, such directors, executive officers and existing shareholders and will hold an aggregate of 4,213,447 outstanding shares of Common Stock (3,838,447 shares if the over-allotment option is exercised in full) which may be resold under Rule 144. The Company also has outstanding warrants to purchase 222,091 shares of Common Stock and a $1.0 million Convertible Note convertible into 83,333 shares of Common Stock (at an assumed conversion price of $12.00 per share) at any time on or before September 2001. The holder of the warrants has agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exercise of the warrants for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. The holder of the warrants is entitled to certain demand and piggy-back registration rights following completion of the Offering. In addition, the Company intends, as soon as practicable after the consummation of the Offering, to register approximately 464,390 shares of Common Stock reserved for issuance to its employees, directors, consultants and advisors under the Company's 1995 Plan, 1996 Plan and Director Plan. Options to purchase an aggregate of 367,321 shares of Common Stock will be outstanding under all such Plans upon the consummation of the Offering. Prior to this Offering, there has been no public market for the Company's Common Stock. Sales of substantial amounts of Common Stock in the public market could adversely affect market prices for the Common Stock and make it more difficult for the Company to sell equity securities in the future at a time and price which it deems appropriate. 46 UNDERWRITING The Underwriters named below (the "Underwriters"), represented by Montgomery Securities and Janney Montgomery Scott Inc. (the "Representatives"), have severally agreed, subject to the terms and conditions in the underwriting agreement (the "Underwriting Agreement"), by and among the Company, the Selling Shareholders and the Underwriters, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names, at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares of Common Stock, if they purchase any. Number of Underwriters Shares - ------------ ----------- Montgomery Securities ........................................ Janney Montgomery Scott Inc ................................... ----------- Total .................................................... 2,500,000 =========== The Representatives have advised the Company and the Selling Shareholders that the Underwriters propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow selected dealers a concession of not more than $ per share; and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the initial public offering, the public offering price and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Selling Shareholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 375,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent that the Underwriters exercise such over-allotment option, the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Offering. The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company, the Selling Shareholders and the Company's officers and directors who are also shareholders of the Company and who, immediately following the Offering (assuming no exercise of the Underwriters' over-allotment option) collectively will beneficially own an aggregate of 4,239,314 shares of Common Stock, have agreed that for a period of 180 days after the effective date of the Offering they will not, without the prior written consent of Montgomery Securities, directly or indirectly offer for sale, sell, solicit an offer to sell, contract or grant an option to sell, pledge, transfer, establish an open put equivalent position or otherwise dispose of any shares of Common stock, options or warrants to acquire shares of Common Stock. The Company has also agreed not to issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock for a period of 180 days after the effective date of the Offering without the prior written consent of Montgomery Securities, subject to limited exceptions and grants and exercises of stock options. The holder of the warrants issued by the Company has also agreed not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exer- 47 cise of the warrants for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. In evaluating any request for a waiver of the 180-day lock-up period, the Underwriters will consider, in accordance with their customary practice, all relevant facts and circumstances at the time of the request, including, without limitation, the recent trading market for the Common Stock, the size of the request and, with respect to a request by the Company to issue additional equity securities, the purpose of such an issuance. See "Shares Eligible for Future Sale." The Representatives have informed the Company that the Underwriters do not expect to make sales of Common Stock offered by this Prospectus to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. Prior to the Offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price of the Common Stock has been determined by negotiations between the Company, the Representatives and the Selling Shareholders. Among the factors to be considered in such negotiations were the history of, and the prospects for, the Company and the industry in which the Company competes, an assessment of the Company's management, its financial condition, its past and present earnings and the trend of such earnings, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the economy and the securities markets at the time of the Offering and the market prices of and demand for publicly traded common stock of comparable companies in recent periods. LEGAL MATTERS An opinion will be rendered by the law firm of Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania, to the effect that the shares of Common Stock offered by the Company and the Selling Shareholders hereby, when issued and paid for as contemplated in this Prospectus, will be legally issued, fully paid and non- assessable. Certain legal matters will be passed upon for the Selling Shareholders by Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland. EXPERTS The Company's and MAB's balance sheets as of December 31, 1994 and 1995 and the Company's statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and MAB's statements of income and shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996 included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand, L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The financial statements of Trans Union Corporation Collections Division at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 included in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, filed as part of the Registration Statement, does not contain all of the information included in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement, including the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract, agreement or other document referred to herein are not necessarily complete and in each such instance, reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement for a more complete description of the matters involved, and each such statement shall be deemed 48 qualified in its entirety by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge and copied at the offices of the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained at the prescribed rates from the Commission's Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission maintains a Web Site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such Web Site is http://www.sec.gov. As a result of the Offering, the Company will be subject to the information requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). So long as the Company is subject to periodic reporting requirements of the Exchange Act, it will continue to furnish the reports and other information required thereby to the Securities and Exchange Commission. The Company will furnish to its shareholders annual reports containing financial statements audited by its independent auditors and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. 49 INDEX TO FINANCIAL STATEMENTS
NCO Group, Inc. Pro Forma Consolidated Financial Statements: Basis of Presentation ............................................................................. F-2 Pro Forma Consolidated Balance Sheet as of June 30, 1996 .......................................... F-3 Pro Forma Consolidated Statement of Income for the six months ended June 30, 1996 ................. F-4 Pro Forma Consolidated Statement of Income for the year ended December 31, 1995 ................... F-5 Notes to Consolidated Pro Forma Financial Statements .............................................. F-6 Historical Financial Statements: Report of Independent Accountants ................................................................. F-8 Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (Unaudited) ..................... F-9 Statements of Income for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1995 and June 30, 1996 (Unaudited) ....................................... F-10 Statements of Shareholders' Equity for each of the years in the three year period ended December 31, 1995 and the six months ended June 30, 1996 (Unaudited) .................................... F-11 Statements of Cash Flows for each of the years in the three year period ended December 31, 1995 and the six months ended June 30, 1995 and June 30, 1996 (Unaudited) ............................... F-12 Notes to Financial Statements ..................................................................... F-13 Management Adjustment Bureau, Inc.: Report of Independent Accountants ................................................................. F-22 Balance Sheets as of December 31, 1994 and 1995 and as of June 30, 1996 ........................ F-23 Statements of Income and Retained Earnings for the three year period ended December 31, 1995 and the six months ended June 30, 1996 ........................................................... F-24 Statements of Cash Flows for each of the years in the three year period ended December 31, 1995 and the six months ended June 30, 1996 ............................................................. F-25 Notes to Financial Statements ..................................................................... F-27 Trans Union Corporation Collections Division: Report of Independent Auditors .................................................................... F-31 Statements of Net Assets as of December 31, 1994 and 1995 ......................................... F-32 Statements of Operations for each of the three years ended December 31, 1995 ...................... F-33 Statements of Cash Flows for each of the three years ended December 31, 1995 ...................... F-34 Notes to Financial Statements ..................................................................... F-35
F-1 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The Pro Forma Consolidated Balance Sheet as of June 30, 1996 and the Pro Forma Consolidated Statements of Income for the year ended December 31, 1995 and the six months ended June 30, 1996 are based on the historical financial statements of NCO Group, Inc. (NCO), Management Adjustment Bureau, Inc. (MAB), Trans Union Corporation Collections Division (TCD) and Eastern Business Services, Inc. (Eastern). The Pro Forma Consolidated Balance Sheet has been prepared assuming the MAB acquisition occurred on June 30, 1996. The Pro Forma Consolidated Statement of Income for the six months ended June 30, 1996 and for the year ended December 31, 1995 has been prepared assuming the MAB, TCD and Eastern acquisitions occurred on January 1, 1995. Additionally, the Pro Forma Consolidated Financial Statements include adjustments relating to NCO's conversion from an S Corporation effective September 3, 1996 (the "Termination Date"). The Pro Forma Consolidated Statements of Income also reflect the assumed issuance of 1,715,950 shares of Common Stock (at an assumed initial public offering price of $12.00 per share), which, net of estimated underwriting discounts and offering expenses payable by the Company, would result in sufficient net proceeds to repay acquisition-related debt and finance the distribution of all undistributed S Corporation earnings through the Termination Date (estimated at $3.0 million, subject to final adjustment.) These shares are assumed to have been issued, and the debt repaid, at the beginning of the periods presented, and thus interest expense attributable to such debt has been eliminated. The Pro Forma Consolidated Balance Sheet reflects the assumed issuance of 2,500,000 shares of Common Stock at June 30, 1996 (at an assumed initial public offering price of $12.00 per share, net of estimated underwriting discounts and offering expenses payable by the Company) and the application of the net proceeds to repay acquisition-related debt and finance the S Corporation distributions, with the remaining net proceeds of approximately $8,750,000 added to working capital. The Pro Forma Consolidated Financial Statements do not purport to represent what NCO's actual results of operations or financial position would have been had the acquisitions occurred as of such dates, or to project NCO's results of operations or financial position for any period or date, nor does it give effect to any matters other than those described in the notes thereto. In addition, the allocations of purchase price to the assets and liabilities of MAB are preliminary and the final allocations may differ from the amounts reflected herein. The unaudited Pro Forma Consolidated Financial Statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. F-2 NCO GROUP, INC. PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (UNAUDITED)
Historical ----------------------------- Acquisition Offering Pro Forma ASSETS NCO MAB Adjustments(1) Pro Forma Adjustments As Adjusted ------------- ------------ -------------- ------------- ---------------- ------------- Current assets: Cash and cash equivalents ......... $ 989,773 $ 475,354 $ (300,000)(2) $ 765,127 $ 8,750,000(6) $ 9,515,127 (400,000)(3) Available-for-sale securities .......... 329,290 329,290 329,290 Accounts receivable, trade ............... 2,830,610 1,234,393 4,065,003 4,065,003 Accounts receivable, purchased ........... Notes receivable ....... 56,088 56,088 56,088 Prepaid expenses and other current assets .. 108,286 135,888 244,174 244,174 ----------- ----------- ------------ ----------- ------------- ----------- Total current assets . 4,257,959 1,901,723 (700,000) 5,459,682 8,750,000 14,209,682 Funds held in trust for clients: Cash .................... 2,089,714 1,393,938 3,483,652 3,483,652 Property and equipment, net .................... 1,420,073 1,160,130 2,580,203 2,580,203 Other assets: Goodwill, net of accumulated amortization ........ 6,074,713 8,035,284(2) 14,109,997 14,109,997 Covenants, net of accumulated amortization ........ 217,708 217,708 217,708 Acquired account inventory, net ...... 85,979 85,979 85,979 Deferred financing costs 243,879 243,879 243,879 Due from related party . 33,811 33,811 33.811 Other assets ........... 264,505 33,703 298,208 298.208 ----------- ----------- ------------ ----------- ------------- ----------- Total other assets ... 6,886,784 67,514 8,035,284 14,989,582 14,989,582 ----------- ----------- ------------ ----------- ------------- ----------- Total assets ......... $14,654,530 $4,523,305 $ 7,335,284 $26,513,119 $ 8,750,000 $35,263,119 =========== =========== ============ =========== ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Demand loan ............ $ 400,000 $ (400,000)(3) Long-term debt, current portion ............. $ 42,333 60,000 $ 102,333 $ 102,333 Capitalized lease obligations, current portion ..... 59,128 108,459 167,587 167,587 Accounts payable ....... 182,023 123,756 305,779 305,779 Accrued expenses ....... 867,933 128.027 200,000(2) 1,195,960 1,195,960 Accrued repayment guarantee ........... 190,000 190,000 190,000 Accrued compensation and related expenses .... 550,423 550,423 550,423 Unearned revenue, net of related costs ....... 98,092 98,092 98,092 ----------- ----------- ------------ ----------- ------------- ----------- Total current liabilities ......... 1,799,932 1,010,242 (200,000) 2,610,174 2,610,174 ----------- ----------- ------------ ----------- ------------- ----------- Funds held in trust for clients ................ 2,089,714 1,393,938 3,483,652 3,483,652 Deferred tax liability ... 219,000(5) 219,000 219,000 Long-term liabilities: Long-term debt, net of current portion ..... 7,118,039 205,000 8,000,000(1) 15,323,039 $ (15,000,000)(6) 323,039 Unearned revenue, net of related costs ....... 258,464 258,464 258,464 Convertible note ....... 1,000,000(1) 1,000,000 Capitalized lease obligations, net of current portion ..... 237,620 149,409 387,029 387.029 Commitments and contingencies Shareholders' equity: Common stock ............ 537,326 19,000 (19,000)(4) 537,326 26,750,000 (6) 26,755,992 (531,334)(5) Unexercised warrants ..... 177,294 177,294 177,294 Unrealized gain on securities ............. 48,475 48,475 48,475 Retained earnings ........ 2,387,666 1,745,716 (1,745,716)(4) 2,468,666 (3,000,000)(5) 81,000 (5) 531,334 ----------- ----------- ------------ ----------- ------------- ----------- Total shareholders' equity ................. 3,150,761 1,764,716 (1,683,716) 3,231,761 23,750,000 26,981,761 ----------- ----------- ------------ ----------- ------------- ----------- Total liabilities and share holders' equity $14,654,530 $4,523,305 $ 7,335,284 $26,513,119 $ 8,750,000 $35,263,119 =========== =========== ============ =========== ============= ===========
See accompanying notes to pro forma consolidated financial statements. F-3 NCO GROUP, INC. PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
Historical ------------------------------ Acquisition Offering Pro Forma NCO MAB Adjustments Pro Forma Adjustments As Adjusted ------------- ------------- -------------- ------------- -------------- --------------- Revenue .................. $12,542,664 $6,776,290 $19,318,954 $ 9,318,954 Operating costs and expenses: Payroll and related expenses ............ 5,953,895 4,254,479 $ (321,750)(7) 9,479,224 9,479,224 (407,400)(8) Selling, general and administrative expenses ............ 4,094,626 2,421,714 6,516,340 6,516,340(11) Depreciation and amortization expense . 422,814 248,921 160,705(9) 832,440 832,340 ------------- ------------- -------------- ------------- -------------- --------------- Total operating costs and expenses ........ 10,471,335 6,925,114 (568,445) 16,828,004 16,828,004 ------------- ------------- -------------- ------------- -------------- --------------- Income (loss) from operations 2,071,329 (148,824) 568,445 2,490,950 2,490,950 Other income (expense): Interest and investment income .............. 47,415 6,712 54,127 54,127 Interest expense ....... (357,494) (30,262) (387,756) $314,785(10) (72,971) ------------- ------------- -------------- ------------- -------------- --------------- Income (loss) before taxes . $ 1,761,250 $ (172,374) $ 568,445 2,157,321 $ 314,785 2,472,106 ============= ============= ============== ============= ============== =============== Pro forma provision for income taxes .................. 1,053,124(12) --------------- Pro forma net income ..... $ 1,418,982 =============== Pro forma net income per share $ 0.23(13) --------------- Pro forma weighted average shares outstanding ..... 6,216,209 ===============
See accompanying notes to pro forma consolidated financial statements. F-4 NCO GROUP, INC. PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
Historical ----------------------------------------------------- Acquisition Offering Pro Forma NCO MAB TCD Eastern(14) Adjustments Pro Forma Adjustments As Adjusted ----------- ---------- --------- ----------- -------------- ----------- ----------------------- Revenue .............. $12,732,597 $12,975,799 $7,467,000 $1,333,675 $ (643,500)(7) $34,509,071 $34,509,071 Operating costs and expenses: Payroll and related expenses ........ 6,797,338 7,909,785 3,125,000 660,617 (1,437,268)(8) 16,411,972 16,411,972 (643,500)(7) Selling, general and administrative expenses ........ 4,042,342 4,138,523 3,840,000 770,742 (260,300)(15) 12,531,307 12,531,307 Depreciation and amortization expense ......... 347,503 457,997 198,000 145,778 379,216 (9) 1,528,494 1,528,494 ----------- ----------- ---------- ----------- -------------- ----------- ----------- ---------- Total operating costs and expenses ........ 11,187,183 12,506,305 7,163,000 1,577,137 (1,961,852) 30,471,773 30,471,773 ----------- ----------- ---------- ----------- -------------- ----------- ----------- ---------- Income (loss) from operations ........ 1,545,414 469,494 304,000 (243,462) 1,961,852 4,037,298 4,037,298 ----------- ----------- ---------- ----------- -------------- ----------- ----------- ---------- Other income (expense): Interest and investment income . 49,473 12,115 61,588 61,588 Interest expense .. (180,205) (26,802) (94,904) (301,911) $252,609(10) (49,302) Loss on disposal of property and equipment ....... (49,082) (175,392) (224,474) (224,474) ----------- ----------- ---------- ----------- -------------- ----------- ----------- ---------- Total other income (expense) ..... (179,814) (190,079) (94,904) (464,797) 252,609 (212,188) ----------- ----------- ---------- ----------- -------------- ----------- ----------- ---------- Income (loss) before taxes ........... $ 1,365,600 $ 279,415 $ 304,000 $ (338,366) $ 1,961,852 $ 3,572,501 $ 252,609 3,825,110 =========== =========== ========== =========== ============== =========== ============ ============ Pro forma provision for income taxes . 1,658,609(12) ---------- Pro forma net income $2,166,501 ========== Pro forma net income per share ....... $ 0.35(13) ========== Pro forma weighted average shares outstanding ..... 6,211,179 ==========
See accompanying notes to pro forma consolidated financial statements. F-5 NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. (1) Gives effect to the acquisition of MAB, as if it occurred on June 30, 1996, for $8.0 million in cash and the issuance of a $1.0 million convertible note payable to MAB's principal shareholder. (2) Reflects goodwill estimated at $8,035,284 resulting from the excess of the purchase price over the estimated fair market value of the net assets acquired, including estimated direct closing costs related to the acquisition of $300,000 and $200,000 related to termination of employees and other items all assumed to have been accrued. (3) Assumes that the $400,000 demand loan payable by MAB was repaid from the available cash of MAB. (4) Reflects the elimination of MAB's common stock and retained earnings in accordance with purchase method accounting. (5) On September 3, 1996, the Company terminated its S Corporation status for federal income tax purposes and declared a distribution of the Company's estimated undistributed S Corporation earnings through the termination date (estimated at $3.0 million, subject to adjustment.) The declaration also resulted in the elimination of the Company's retained earnings and a charge of $531,334 to the common stock account for the excess of the distribution over the Company's retained earnings. A $219,000 net deferred tax liability was also established based on the estimated book and tax differences of NCO and MAB. (6) Gives effect to the sale by the Company of 2,500,000 shares of Common Stock in the Offering and the application of the estimated net proceeds of $26.8 million to repay the outstanding debt of $15.0 million under the revolving credit facility and to pay the S Corporation distributions (estimated at $3.0 million) to existing shareholders of the Company, with the balance of $8.8 million added to working capital. (7) Reflects the reduction in salary of MAB's principal shareholder (who is no longer active in the day- to-day operations of MAB's business), pursuant to a new employment agreement, in the amount of $321,750 and $643,500 for the six-months ended June 30, 1996 and the year ended December 31, 1995, respectively. (8) Reflects the elimination of payroll and related expenses of $407,400 and $1,437,268 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively, relating to the elimination of certain redundant collection and administration personnel costs immediately identifiable at the time of the acquisitions. (9) Reflects amortization expenses of $160,705 and $680,808 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively assuming MAB, TCD and Eastern had been acquired at the beginning of the periods presented. In addition, reflects the elimination of depreciation and amortization expense related to assets not acquired by NCO as part of the acquisitions of TCD and Eastern of $301,592 for the year ended December 31, 1995. (10) Reflects the elimination of interest expenses on current and long-term debt assumed to be repaid with the offering proceeds at the beginning of the periods presented. (11) Includes a non-recurring charge of $190,000 recorded by MAB to account for potential losses relating to certain repayment guarantees made on behalf of third parties. F-6 NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) (12) Reflects estimated provision for income taxes, at an assumed rate of 40% after giving consideration to non-deductible goodwill expense, assuming the Company had converted from an S Corporation to a C Corporation at the beginning of the periods presented. (13) Pro forma net income per share was computed by dividing the pro forma net income for the year ended December 31, 1995 and for the six months ended June 30, 1996 by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common share equivalents giving retroactive effect as of January 1, 1995 to the 46.56 for one stock split and the issuance of 1,715,950 shares of common stock (at an assumed initial public offering price of $12.00 per share) net of estimated underwriting discounts and offering expenses payable by the Company, to result in net proceeds sufficient to finance the estimated $3,000,000 S Corporation distributions and repay $15,000,000 of acquisition - related debt. (14) Represents the results of operations prior to the acquisition of Eastern in August 1995. (15) Reflects the difference between the Company's rent expense for the TCD facilities pursuant to lease agreements entered into upon the acquisition and the occupancy costs allocated to TCD by its parent prior to the acquisition. F-7 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of NCO Group, Inc. Blue Bell, Pennsylvania We have audited the accompanying balance sheets of NCO Group, Inc. as of December 31, 1994 and 1995 and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NCO Group, Inc. as of December 31, 1994 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 16, 1996, except as to Notes 1, 2, 3, 7 and 13 for which the date is September 30, 1996 F-8 NCO GROUP, INC. BALANCE SHEETS
December 31, June 30, ----------------------------- ------------- ASSETS 1994 1995 1996 ------------- ------------ ------------- (Unaudited) Current assets: Cash and cash equivalents ......................... $ 526,018 $ 804,550 $ 989,773 Available-for-sale securities ..................... 239,944 299,488 329,290 Accounts receivable, trade, net of allowance for doubtful accounts of $7,400, $23,200 and $64,554, respectively .......................... 603,176 1,394,801 2,830,610 Accounts receivable, purchased .................... 44,038 7,745 Notes receivable .................................. 64,000 100,000 Prepaid expenses and other current assets ......... 96,552 118,793 108,286 ------------- ------------ ------------- Total current assets ......................... 1,573,728 2,725,377 4,257,959 ------------- ------------ ------------- Funds held in trust for clients ..................... 746,989 1,228,889 2,089,714 Property and equipment, net ......................... 477,327 637,133 1,420,073 Other assets: Goodwill, net of accumulated amortization ......... 940,387 2,636,271 6,074,713 Covenants, net of accumulated amortization ........ 217,708 Acquired account inventory, net ................... 244,499 138,623 85,979 Deferred financing costs .......................... 279,014 243,879 Other assets ...................................... 122,789 227,826 264,505 ------------- ------------ ------------- Total other assets ........................... 1,307,675 3,281,734 6,886,784 ------------- ------------ ------------- $4,105,719 $7,873,133 $14,654,530 ============= ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion ................... $ 316,863 $ 46,171 $ 42,333 Capitalized lease obligations, current portion .... 59,128 Accounts payable .................................. 59,961 221,562 182,023 Accrued expenses .................................. 169,045 565,734 867,933 Accrued compensation and related expenses ......... 222,587 777,985 550,423 Unearned revenue, net of related costs ............ 332,671 302,384 98,092 ------------- ------------ ------------- Total current liabilities .................... 1,101,127 1,913,836 1,799,932 ------------- ------------ ------------- Funds held in trust for clients ..................... 746,989 1,228,889 2,089,714 Long-term liabilities: Long-term debt, net of current portion ............ 732,333 2,592,906 7,118,039 Capitalized lease obligations, net of current portion ........................................ 237,620 Unearned revenue, net of related costs ............ 102,586 86,155 258,464 Commitments and contingencies ....................... Shareholders' equity: Common stock, no par value, 25,000,000 shares authorized, 4,126,566, 4,213,447 and 4,213,447 shares issued and outstanding December 31, 1994 and 1995 and June 30, 1996, respectively ....... 349,326 537,326 537,326 Unexercised warrants .............................. 177,294 177,294 Retained earnings ................................. 1,086,053 1,378,261 2,387,666 Unrealized gain (loss) on securities .............. (12,695) 41,339 48,475 Notes receivable -- shareholder ................... (82,873) ------------- ------------ ------------- Total shareholders' equity ................... 1,422,684 2,051,347 3,150,761 ------------- ------------ ------------- $4,105,719 $7,873,133 $14,654,530 ============= ============ =============
The accompanying notes are an integral part of these financial statements. F-9 NCO GROUP, INC. STATEMENTS OF INCOME
For the Six Months Ended For the Years Ended December 31, June 30, ----------------------------------------------- ------------------------------ 1993 1994 1995 1995 1996 ------------- ------------- -------------- ------------ -------------- (unaudited) (unaudited) Revenue ........................ $7,444,982 $8,577,895 $12,732,597 $5,546,258 $12,542,664 Operating costs and expenses: Payroll and related expenses . 4,122,528 4,558,351 6,797,338 2,956,773 5,953,895 Selling, general and administrative expenses ... 2,390,741 2,673,521 4,042,342 1,744,785 4,094,626 Depreciation and amortization expense ................... 141,497 215,117 347,503 115,869 422,814 ------------- ------------- -------------- ------------ -------------- 6,654,766 7,446,989 11,187,183 4,817,427 10,471,335 ------------- ------------- -------------- ------------ -------------- Income from operations ......... 790,216 1,130,906 1,545,414 728,831 2,071,329 ------------- ------------- -------------- ------------ -------------- Other income (expense): Interest and investment income 24,135 26,735 49,473 24,560 47,415 Interest expense ............. (13,607) (71,588) (180,205) (48,305) (357,494) Loss on disposal of property and equipment ............. (49,082) (49,082) ------------- ------------- -------------- ------------ -------------- 10,528 (44,853) (179,814) (72,827) (310,079) ------------- ------------- -------------- ------------ -------------- Net income ..................... $ 800,744 $1,086,053 $ 1,365,600 $ 656,004 $ 1,761,250 ============= ============= ============== ============ ============== Pro forma (unaudited): Historical income before income taxes .............. $ 800,744 $1,086,053 $ 1,365,600 $ 656,004 $ 1,761,250 Pro forma provision for income taxes ..................... 320,000 434,000 546,000 262,000 704,000 ------------- ------------- -------------- ------------ -------------- Pro forma net income ......... $ 480,744 $ 652,053 $ 819,600 $ 394,004 $ 1,057,250 ============= ============= ============== ============ ============== Pro forma net income per share $ 0.17 $ 0.22 ============== ============== Pro forma weighted average shares outstanding ........ 4,745,229 4,750,259 ============== ==============
The accompanying notes are an integral part of these financial statements. F-10 NCO GROUP, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock -------------------------- Unrealized Number Gains Notes of Unexercised Retained (Losses) on Receivable Shares Amount Warrants Earnings Securities Shareholder Total ----------- ----------- ------------- ------------- ------------ ------------- ------------- January 1, 1993 ............ 4,002,763 $ 49,326 $ 670,728 $ 720,054 Net income ................. 800,744 800,744 Distributions to shareholders (658,106) (658,106) Change in unrealized gains on securities ................ $ 13,539 13,539 ----------- ----------- ------------- ------------- ------------ ------------- ------------- Balance, December 31, 1993 . 4,002,763 49,326 813,366 13,539 876,231 Issuance of common stock ... 123,803 300,000 300,000 Net income ................. 1,086,053 1,086,053 Distributions to shareholders (813,366) (813,366) Change in unrealized losses on securities ................ (26,234) (26,234) ----------- ----------- ------------- ------------- ------------ ------------- ------------- Balance, December 31, 1994 . 4,126,566 349,326 1,086,053 (12,695) 1,422,684 Issuance of common stock ... 86,881 188,000 $ (135,888) 52,112 Warrants issued (Note 7) ... $177,294 177,294 Note repayments ............ 53,015 53,015 Net income ................. 1,365,600 1,365,600 Distributions to shareholders (1,073,392) (1,073,392) Change in unrealized gains on securities ................ 54,034 54,034 ----------- ----------- ------------- ------------- ------------ ------------- ------------- Balance, December 31, 1995 . 4,213,447 537,326 177,294 1,378,261 41,339 (82,873) 2,051,347 Note repayments ............ 82,873 82,873 Net income (unaudited) ..... 1,761,250 1,761,250 Distributions to shareholders (unaudited) ............... (751,845) (751,845) Change in unrealized gains on securities (unaudited) . 7,136 7,136 ----------- ----------- ------------- ------------- ------------ ------------- ------------- Balance, June 30, 1996 (unaudited) ............... 4,213,447 $537,326 $177,294 $ 2,387,666 $ 48,475 $3,150,761 =========== =========== ============= ============= ============ ============= =============
The accompanying notes are an integral part of these financial statements. F-11 NCO GROUP, INC. STATEMENTS OF CASH FLOWS
For the Six Months Ended For the Years Ended December 31, June 30, (unaudited) -------------------------------------------- ---------------------------- 1993 1994 1995 1995 1996 ----------- ------------- ------------- ------------- ----------- Cash flows from operating activities: Net income ......................................... $ 800,744 $ 1,086,053 $ 1,365,600 $ 656,004 $ 1,761,250 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .................................. 141,497 171,378 199,123 83,065 150,008 Loss/(gain) on disposal of equipment .......... 49,082 49,082 (9,043) Loss/(gain) on sale of securities ............. 9,001 4,421 2,877 2,609 (8,925) Amortization of goodwill and covenants ........ 43,739 115,937 32,804 237,670 Amortization of deferred financing fees ....... 32,443 35,135 Provision for doubtful accounts ............... 3,903 3,808 3,808 33,000 Amortization of deferred rent ................. (59,100) Other noncash credits ......................... (5,531) Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade ................. (17,776) (41,675) (571,611) (566,168) (646,041) Notes receivable ........................... (64,000) (36,000) 64,000 100,000 Acquired accounts inventory ................ 71,375 105,876 53,235 52,644 Accounts receivable, purchased ............. (44,038) 36,293 22,062 7,745 Prepaid expenses ........................... (5,728) (40,249) (22,241) (2,153) 10,507 Other assets ............................... (27,868) (40,112) (105,037) (4,695) (26,679) Accounts payable ........................... 33,036 (123,094) 161,601 (39,539) Accrued expenses ........................... 70,511 (214) 187,353 561,334 302,199 Accrued compensation and related expenses .. 51,755 555,398 (1,200) (227,562) Unearned revenue ........................... 40,929 23,950 (46,718) (2,897) (31,982) ----------- ------------- ------------ ------------- ----------- Net cash provided by operating activities 979,715 1,103,192 2,033,784 950,890 1,700,387 ----------- ------------- ------------ ------------- ----------- Cash flows from investing activities: Purchase of property and equipment ................. (131,927) (77,999) (298,076) (88,439) (426,069) Purchase of securities ............................. (29,187) (169,785) (107,643) (88,089) (53,307) Proceeds from sales of securities .................. 26,466 143,613 99,256 69,640 39,566 Net cash paid for acquisitions ..................... (1,000,000) (1,729,244) (4,875,839) ----------- ------------- ------------ ------------- ------------ Net cash used in investing activities . (134,648) (1,104,171) (2,035,707) (106,888) (5,315,649) ----------- ------------- ------------ ------------- ------------- Cash flows from financing activities: Issuance of notes payable .......................... 1,000,000 Repayment of notes payable ......................... (79,530) (222,084) (1,067,117) (185,040) (80,543) Borrowings under credit agreement .................. 2,450,000 4,550,000 Payment of fees to acquire new debt ................ (134,163) Issuance of common stock ........................... 105,127 52,112 Decrease in notes receivable -- shareholders ....... 33,604 82,873 Distributions to shareholders ...................... (658,106) (813,366) (1,073,392) (914,956) (751,845) ----------- ------------- ------------ ------------- ----------- Net cash provided by (used in) financing activities .......................... (704,032) (35,450) 280,455 (1,047,884) 3,800,485 ----------- ------------- ------------- ------------- ----------- Net increase (decrease) in cash ...................... 141,035 (36,429) 278,532 (203,882) 185,223 Cash and cash equivalents at beginning of year ....... 421,412 562,447 526,018 526,018 804,550 ----------- ------------- ------------ ------------- ----------- Cash and cash equivalents at end of year ............. $ 562,447 $ 526,018 $ 804,550 $ 322,136 $ 989,773 =========== ============= ============ ============= =========== Supplemental disclosures of cash flow information: Cash paid for interest ............................. $ 13,559 $ 71,588 $ 157,379 $ 48,653 $ 323,097 Noncash investing and financing activities: Note receivable -- shareholder .................. 82,873 82,873 Fair value of assets acquired ................... 442,874 2,145,578 982,018 Liabilities assumed from acquisitions ........... 127,000 416,334 Warrants issued with debt ....................... 177,294 Property acquired under capital leases .......... 348,586 Common stock issued for acquisition ............. 300,000
The accompanying notes are an integral part of these financial statements. F-12 NCO GROUP, INC. Notes to Financial Statements (AMOUNTS AND DISCLOSURES FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 ARE UNAUDITED) NOTE 1. NATURE OF OPERATIONS: NCO Group, Inc. (the "Company") is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company's client base is comprised of companies in the following industries: education, financial services, healthcare, telecommunications, utilities and government entities. Effective September 3, 1996, the Company reorganized its corporate structure. At September 3, 1996, the shareholders of NCO Financial Systems, Inc. contributed each of their shares of common stock in exchange for one share of common stock of the Company, a recently formed corporation. The Company effected a 46.56-for- one stock split in September 1996 and increased the number of authorized shares to 5,000,000 shares of preferred stock and 25,000,000 shares of common stock. All per share and related amounts have been adjusted to reflect the stock exchange and stock split. Simultaneously with the contribution of the common stock of NCO Financial Systems, Inc., two additional subsidiaries of NCO Group were formed. Prior to September 3, 1996, NCO Financial Systems, Inc. was the only company within NCO Group, Inc. to have operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: REVENUE RECOGNITION: The Company generates revenues from contingency fees and contractual services. Contingency fee revenue is recognized upon collection of funds on behalf of clients. Contractual services revenue is deferred and recognized as services are performed. PROPERTY AND DEPRECIATION: Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful life of each class of assets using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss on the transaction is included in the statement of income. INCOME TAXES: The Company has elected to be taxed as an S Corporation under the Internal Revenue Code and the Pennsylvania Tax Code. While this election was in effect, no provision was made for income taxes by the Company since all income is taxed directly to, and losses and tax credits utilized directly by, the shareholders of the Company. The Company terminated its S Corporation status on September 3, 1996. Upon termination of its Subchapter S status, the Company adopted SFAS No. 109, "Accounting for Income Taxes". This standard requires an asset and liability approach that takes into account changes in tax rates when valuing the deferred tax amounts to be reported in the balance sheet. Upon termination of the S Corporation status and adoption of SFAS 109, the Company recorded an estimated net deferred tax asset that will not have a material impact on the financial statements. The net deferred tax asset resulted primarily from differences in the treatment of unearned revenue and acquired account inventory. F-13 NCO GROUP, INC. Notes to Financial Statements - (Continued) (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 2. Summary of Significant Accounting Policies: - (Continued) CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. These financial instruments potentially subject the Company to concentrations of credit risk. At December 31, 1994 and 1995 and June 30, 1996, the Company had bank deposits in excess of federally insured limits of approximately $500,000, $1,276,000 and $2,514,474, respectively. The Company's cash deposits have been placed with a large national bank to minimize risk and the cost approximates fair value. CREDIT POLICY: The Company has two types of arrangements under which it collects its contingency fee revenue. For certain clients the Company remits funds collected on behalf of the client, net of the related contingency fees while, for other clients, the Company remits gross funds, collected on behalf of clients, and bills the client separately for its contingency fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In the event of collection delays from clients, management may at its discretion change from the gross remittance method to the net remittance method. INVESTMENT SECURITIES: The Company accounted for marketable securities in accordance with Statement of Financial Accounting Standards SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," for all periods presented. The statement requires management to make a determination as to which of three categories they will report their investments in: "held to maturity" which are reported at amortized cost; "trading securities" which are reported at fair value with changes in unrealized gains or losses included in current earnings and "available for sale" securities which include all investments not included in the above two categories and are reported at fair value with changes in unrealized gains and losses reflected directly as a separate component of shareholders' equity. Realized gains and losses on the sale of securities are recognized using the specific identification method and included in the statement of income. ACCOUNTS RECEIVABLE PURCHASED: Purchased accounts receivable portfolios are recorded at cost and amortized, based upon a percentage of expected collections, over the estimated life of the individual portfolios. The amortization rates are reviewed periodically and adjusted based on the projected overall collection performance of each portfolio. ACQUIRED ACCOUNT INVENTORY: Acquired account inventory consists of individual contracts with student loan debtors that do not exceed three years. These accounts are periodically reviewed by management for collectibility. GOODWILL AND ACQUISITION COSTS: Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired business. Goodwill is amortized on a straight-line basis over 15 years. The recoverability of goodwill is periodically reviewed by the Company. In making such determination with respect to goodwill, the Company evaluates the operating cash flows of the underlying business which gave rise to such amount. Accumulated amortization at December 31, 1994 and 1995 and June 30, 1996 totaled $43,739, $159,676 and $377,553, respectively. F-14 NCO GROUP, INC. Notes to Financial Statements - (Continued) (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 2. Summary of Significant Accounting Policies: - (Continued) COVENANTS: Non-compete covenants are based on an allocation of the purchase price of $237,500 in connection with the acquisition of Trans Union Corporation Collections Division (TCD) on January 3, 1996. The non-compete covenant is being amortized on a straight-line basis over the term of the covenant which is 5 years. DEFERRED FINANCING COSTS: Deferred financing costs relate to debt issuance costs incurred which are capitalized and amortized over the term of the debt. ESTIMATES UTILIZED IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS PER SHARE: On September 3, 1996, the shareholders of NCO Financial Systems, Inc. (Note 1) contributed each of their shares of common stock in exchange for one share of the Company's common stock. The Company effected a 46.56-for-one stock split in September 1996. All per share and related amounts contained in these financial statements and notes have been adjusted to reflect the stock exchange and stock split. Pro forma net income per share was computed by dividing the pro forma net income for the year ended December 31, 1995 and for the six-month period ended June 30, 1996 by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common equivalent shares giving retroactive effect as of January 1, 1995 to the stock split. All outstanding options and warrants have been treated as common equivalent shares in calculating pro forma net income per share, using the treasury stock method and an assumed initial public offering price of $12.00 per share, only when their effect would be dilutive. The pro forma weighted average number of shares outstanding have also been adjusted to include the number of shares of common stock (250,000) that the Company would have needed to issue at the assumed initial public offering price of $12.00 per share to finance the distribution of undistributed S Corporation earnings through the date on which the Company terminated its S Corporation status (estimated at $3,000,000). INTERIM FINANCIAL INFORMATION: The interim financial information as of June 30, 1996 and for the six months ended June 30, 1996 and 1995 has been prepared from the unaudited financial records of the Company and in the opinion of management, reflects all adjustments necessary for a fair presentation of the financial position and results of operations and of cash flows for the respective interim periods. All adjustments were of a normal and recurring nature. 3. ACQUISITIONS: On January 3, 1996, the Company purchased certain assets of TCD for $4,750,000 in cash. The purchase price was allocated based upon the estimated fair market value of property, accounts receivable and an agreement not to compete which resulted in goodwill in the amount of $3,681,000. F-15 NCO GROUP, INC. Notes to Financial Statements - (Continued) (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 3. Acquisitions: - (Continued) On August 1, 1995, the Company purchased certain assets of Eastern Business Services, Inc. (Eastern) for approximately $2,041,000 comprised of $1,625,000 in cash and $416,000 of liabilities assumed. The purchase price was allocated primarily based upon the estimated fair market values of accounts receivable and equipment purchased less notes payable and funds due to clients which resulted in goodwill in the amount of $1,812,000. On April 29, 1994 the Company purchased certain assets of B. Richard Miller, Inc. (BRM) at a cost of $1,427,000, which was comprised of $1,000,000 in cash, common stock valued at $300,000 and a note payable to the seller of $127,000. The purchase price was allocated based upon the estimated fair market value of the acquired property and equipment and account inventory and resulted in goodwill of $984,126. The following summarizes unaudited pro forma results of operations for the years ended December 31, 1994 and 1995 and the six months ended June 30, 1996, assuming the acquisitions (including the acquisition of MAB on September 5, 1966) occurred as of the beginning of the respective periods. June 30, 1994 1995 1996 ------------- ------------- -------------- Net revenue ... $30,530,000 $34,509,000 $19,319,000 Income before taxes ....... 3,001,000 3,825,000 2,472,000 4. MARKETABLE SECURITIES: The Company has classified all of its securities as "available for sale" and has recorded them at fair value and unrealized gains and losses as a separate component of shareholders' equity. Proceeds from the sale of investment securities were $26,466, $143,613 and $99,256 for the years ended December 31, 1993, 1994 and 1995, respectively and $69,640 and $39,566 for the six months ended June 30, 1995 and 1996, respectively. Unrealized Unrealized Holding Holding Fair Cost Gain Loss Value ----------- ------------ ------------ ----------- 1994 ------ Common stock ..... $162,342 $ 8,827 $ (18,650) 152,519 Corporate bonds ... 90,297 (2,872) 87,425 ----------- ------------ ------------ ----------- $252,639 $ 8,827 $ (21,522) $239,944 =========== ============ ============ =========== 1995 ----- Common stock ...... $167,852 $41,475 $ (6,164) $203,163 Corporate bonds ... 90,297 6,028 96,325 ----------- ------------ ------------ ----------- $258,149 $47,503 $ (6,164) $299,488 =========== ============ ============ =========== 1996 ----- Common stock ...... $190,518 $48,503 $ (1,971) $237,050 Corporate bonds ... 90,297 1,943 92,240 ----------- ------------ ------------ ----------- $280,815 $50,446 $ (1,971) $329,290 =========== ============ ============ =========== F-16 NCO GROUP, INC. Notes to Financial Statements - (Continued) (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 4. Marketable Securities: - (Continued) Investment income, included in interest and investment income on the statement of income, consisted of:
Six Months Ended Year Ended December 31, June 30, -------------------------------------- ----------------------- 1993 1994 1995 1995 1996 ----------- ---------- ---------- --------- ---------- Realized gain on the sale of available-for-sale securities .. $ 11,749 $ 12,217 $ 7,255 $11,535 Realized loss on the sale of available- for-sale securities . $ (9,001) (16,170) (15,094) (9,864) (2,610) Interest income .................. 7,497 5,142 7,035 3,517 3,517 Dividend income .................. 5,835 5,211 5,892 2,866 3,270 ----------- ---------- ---------- --------- ---------- $ 4,331 $ 5,932 $ 10,050 $ 3,774 $15,712 =========== ========== ========== ========= ==========
The fair values of marketable securities by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or repayment penalties December 31, June 30, ----------------------- ---------- 1994 1995 1996 --------- --------- ---------- Within one year ............. $20,425 $20,208 After one year but within 5 years ..................... $29,375 10,537 10,172 After 5 years but within 10 years ..................... 58,050 65,363 61,860 --------- --------- ---------- $87,425 $96,325 $92,240 ========= ========= ========== 5. FUNDS HELD IN TRUST FOR CLIENTS: In the course of the Company's regular business activities as a accounts receivable management company, the Company receives clients' funds arising from the collection of accounts placed with the Company. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. 6. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of the following: December 31, June 30 --------------------------- ------------ 1994 1995 1996 ----------- ----------- ------------ Leased assets ........... $ 324,414 Computer equipment ...... $726,099 $ 905,732 1,368,155 Furniture and fixtures .. 236,413 316,312 462,423 ----------- ----------- ------------ 962,512 1,222,044 2,154,992 Less accumulated depreciation .......... 485,185 584,911 734,919 ----------- ----------- ------------ $477,327 $ 637,133 $1,420,073 =========== =========== ============ Depreciation of property and equipment is calculated on a straight-line basis over their estimated useful lives. Amounts charged to operations amounted to $141,497, $171,378 and $199,123 for the years ended 1993, 1994 and 1995, respectively and $83,065 and $150,008 for the six months ended June 30, 1995 and 1996, F-17 NCO GROUP, INC. Notes to Financial Statements - (Continued) (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 6. Property and Equipment: - (Continued) respectively. Included in leased assets shown above for the six months ended June 30, 1996 are capital leases with a gross amount of $324,414 and accumulated depreciation of $17,429. The Company had not entered into any capital lease transactions for the years ended December 31, 1994 and 1995. 7. LONG-TERM DEBT:
December 31, June 30, ---------------------------- ------------- 1994 1995 1996 ----------- ------------- ------------- Revolving credit agreement, prime plus 1.375%, due July 1999 ......... $2,450,000 $7,000,000 Non-interest bearing note acquired; $225,750 face amount, payable in monthly installments of $5,250 through July 1999 (less unamortized discount based on imputed interest rate of 10%) ...... 189,077 160,372 Note payable, bank, prime plus 1.0%, due April 1999 ...................... $ 662,500 Note payable, bank, prime plus 0.5%, due March 1996 ...................... 250,000 Note payable, bank, 7.15%, due August 1995 ............................... 59,112 Subordinated seller note payable, prime plus 1.5%, due August 1995 ... 77,584 ---------- ------------- ------------- 1,049,196 2,639,077 7,160,372 Less current portion ................. (316,863) (46,171) (42,333) ----------- ------------- ------------- $ 732,333 $2,592,906 $7,118,039 =========== ============= =============
The following summarizes the Company's required debt payments for the next five years: 1996 ................................................. $ 46,000 1997 ................................................. 46,000 1998 ................................................. 46,000 1999 ................................................. 2,501,000 2000 ................................................. -- ------------ $2,639,000 ============ In July 1995 the Company entered into a revolving credit agreement which provides for borrowings up to $7,000,000 to be utilized for working capital and qualified acquisition indebtedness of the Company. The line of credit is collateralized by substantially all the assets of the Company. Proceeds from the agreement were utilized to primarily refinance notes payable due to the bank in the amount of approximately $850,000, and cash payments of $1,600,000 and $4,500,000 for the acquisition of Eastern and TCD, respectively (see Note 3). The revolving credit agreement contains, among other provisions, requirements for maintaining defined levels of working capital, net worth, capital expenditures, various financial ratios and restrictions of distributions to shareholders. The Company recorded deferred charges of approximately $311,000 in connection with the acquisition of the revolving credit agreement, which consisted primarily of bank charges, legal fees and warrants issued to the F-18 NCO GROUP, INC. Notes to Financial Statements - (Continued) (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 7. Long-Term Debt: - (Continued) bank exercisable into an aggregate of 175,531 shares of the Company's common stock. The warrants expire on July 31, 2005 and are only exercisable upon certain events at a nominal exercise price. The bank had the right to put, and the Company had the ability to call, the warrants during the twelve-month period ending on July 31, 2001. However, these rights were eliminated as part of the increase in the credit agreement in August 1996. In August 1996 the credit agreement was increased to $15,000,000 to provide financing for the acquisition of Management Adjustment Bureau, Inc. and the bank received a warrant for 46,560 shares, exercisable at the initial public offering price, as consideration. In addition, the bank agreed to increase the credit agreement to $25,000,000 upon completion of the Company's initial public offering (see Note 13) and will receive, as consideration, a warrant for an additional 18,500 shares, exercisable at the initial public offering price. In connection with the acquisition of Eastern Business Services, the Company assumed a noninterest-bearing note payable with an outstanding face amount of $225,750 at December 31, 1995 and June 30, 1996. Long-term debt is primarily variable in nature and is based on the prime rate. Management estimates the carrying value of long-term debt approximates fair value. 8. EMPLOYEE BENEFIT PLANS: The Company has a savings plan under Section 401(k) of the Internal Revenue Code (the "Plan"). The Plan allows all eligible employees to defer up to 20% of their income on a pretax basis through contributions to the Plan. The Company will match 25% of employee contributions for an amount up to 6% of each employee's base salary. The charge to operations for the matching contributions was $22,828, $23,536 and $30,027 for 1993, 1994 and 1995, respectively and $14,819 and $20,525 for the six months ended June 30, 1995 and 1996. F-21 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 9. LEASES: The Company has entered into various office lease agreements with limited partnerships owned by shareholders of the Company. In addition, the Company has made disbursements on behalf of the limited partnerships and has recorded a note receivable of $64,000 and $100,000 at December 31, 1994 and 1995, respectively. This note was repaid during the six-months ended June 30, 1996. The Company leases certain equipment under agreements which are classified as capital leases. The equipment leases have original terms ranging from 36 to 48 months, and have purchase options at the end of the original lease term. The Company also leases certain equipment under noncancelable operating leases. Future minimum payments, by year and in the aggregate, under noncancelable capital leases and operating leases with initial or remaining terms of one year or more consist of the following at December 31, 1995: 1996 ................................................... $ 815,000 1997 ................................................... 758,000 1998 ................................................... 658,000 1999 ................................................... 640,000 2000 ................................................... 573,000 Thereafter ............................................. 1,975,000 $5,419,000 ============ F-19 NCO GROUP, INC. Notes to Financial Statements - (Continued) (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 9. Leases: - (Continued) Rent expense was $466,189, $305,308 and $463,916 for the years ended December 31, 1993, 1994 and 1995, respectively and $466,453 and $194,162 for the six months ended June 30, 1996 and 1995. The related party office lease expense was $81,563, $297,500 and $385,217 for 1993, 1994 and 1995, respectively and $201,825 and $282,289 for the six months ended June 30, 1995 and 1996, and provides for an escalation clause which takes effect in 1998. The total amount of base rent payments is being charged to expense on the straight-line method over the term of the lease. 10. STOCK OPTIONS: The Company adopted a stock option plan (the Plan) in 1995 for its employees. The Plan authorized 221,719 shares of the Company's common stock to be issued pursuant to either incentive stock options or non-qualified stock options. The option price for incentive stock options shall be equal to at least fair market value, at the date of grant, whereas the option price for non-qualified stock options may be less than fair market value. The vesting period of options issued under either plan is at the discretion of the Board of Directors. The maximum exercise period is ten years after the date of grant. A summary of stock option activity since inception of the plan is as follows: Number of Number of Option Price Shares Options Per Share Exercisable ----------- -------------- ------------- Outstanding at January 1, 1995 ..................... Granted ............... 144,057 $2.73 144,057 Exercised ............. Expired ............... ---------- -------------- ------------- Outstanding at December 31, 1995 ..................... 144,057 2.73 144,057 Granted ............... Exercised ............. Expired ............... ----------- -------------- ------------- Outstanding at June 30, 1996 144,057 $2.73 144,057 =========== ============== ============= As part of the purchase price for the acquisition of certain assets of B. Richard Miller, Inc., 123,803 shares of the Company's common stock were issued to BRM's principal shareholder, who also received an option to purchase up to an additional 86,881 shares of the Company which was exercised during 1995 at a cost of $188,000. As a result of the purchase of these shares, a receivable of $82,873 was due from the seller as of December 31, 1995 which was subsequently repaid during the six month period ended June 30, 1996. 11. RECENT ACCOUNTING PRONOUNCEMENTS: In October 1995, the FASB issued (SFAS No. 123), "Accounting for Stock-Based Compensation", which is effective for the Company in 1996. SFAS No. 123 requires Companies to either recognize compensation expense, based on fair value of the stock-based compensation determined by an option pricing model utilizing various assumptions regarding the underlying attributes of the options and the Company's stock, or provide pro-forma disclosures and continue to recognize compensation expense in accordance with Accounting Practices Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The Company will adopt the provisions of SFAS No. 123 in its 1996 annual financial statements. The adoption of SFAS No. 123 had no effect on the Company's cash flows. In March 1995, the FASB issued (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", which was effective for the Company beginning January 1, 1996. F-20 NCO GROUP, INC. Notes to Financial Statements - (Continued) (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 11. Recent Accounting Pronouncements: - (Continued) SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment, based on the estimated future cash flows, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. SFAS No. 121 had no impact on the financial statements upon adoption. 12. COMMITMENTS AND CONTINGENCIES: The Company is party from time to time to various legal proceedings incidental to its business. In the opinion of management none of these items individually or in the aggregate would have a significant effect on the financial position, results of operations, or cash flows of the Company. 13. SUBSEQUENT EVENTS: The Company filed a registration statement in September 1996 with the Securities and Exchange Commission in connection with a proposed initial public offering of 2,500,000 shares of its common stock. The Company intends to use the proceeds for repayment of bank debt incurred to finance acquisitions, payment of S Corporation distributions, and for working capital and other general corporate purposes, including possible acquisitions. The Company purchased the common stock of Management Adjustment Bureau, Inc. for $8,000,000 in cash and a $1,000,000 convertible note on September 5, 1996. The purchase price was allocated based upon the estimated fair market value of the acquired assets and liabilities. Goodwill generated in this acquisition will be amortized over 25 years. MAB provides accounts receivable management to a variety of general businesses. F-21 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholder of Management Adjustment Bureau, Inc. We have audited the accompanying balance sheets of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996, and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996, in conformity with generally accepted accounting principles. Coopers & Lybrand, L.L.P. Rochester, New York August 20, 1996 F-22 MANAGEMENT ADJUSTMENT BUREAU, INC. BALANCE SHEETS
December 31, June 30, Assets 1994 1995 1996 ------ ------------ ------------ ------------ Current assets: Cash ............................................ $ 413,088 $ 290,197 $ 475,354 Accounts receivable (less allowance for doubtful accounts of $47,000, $80,420 and $92,808, respectively) ................................ 924,551 1,308,511 1,234,393 Property held for sale .......................... 217,400 Loans receivable ................................ 57,623 56,088 Prepaid expenses ................................ 145,476 162,091 135,888 ------------ ------------ ------------ Total current assets ......................... 1,483,115 2,035,822 1,901,723 ------------ ------------ ------------ Funds held in trust for clients ................... 1,778,502 1,530,270 1,393,938 Property and equipment, net ....................... 1,005,664 1,319,614 1,160,130 Other assets: Loan receivable ................................. 50,000 33,811 Cash value - officer's life insurance ........... 6,256 6,673 7,189 Deposits ........................................ 12,000 16,200 26,514 ------------ ------------ ---------- Total other assets ........................... 68,256 22,873 67,514 ------------ ------------ ---------- $4,335,537 $4,908,579 $4,523,305 ============ ============ ========== Liabilities and Retained Earnings Current liabilities: Line-of-credit .................................. $ 446,000 $ 400,000 Long-term debt, current portion ................. $ 252,176 271,456 168,459 Accounts payable ................................ 41,917 92,738 123,756 Accrued distribution ............................ 64,500 Accrued repayment guarantee ..................... 190,000 Accrued compensation ............................ 28,369 192,375 97,044 Accrued expenses ................................ 24,309 28,573 30,983 ------------ ------------ ---------- Total current liabilities .................... 411,271 1,031,142 1,010,242 ------------ ------------ ---------- Funds held in trust for clients ................... 1,778,502 1,530,270 1,393,938 Long-term debt .................................... 173,089 410,077 354,409 Retained earnings: Common stock, no par value; Class A - authorized 200 shares; issued and outstanding 100 shares 19,000 19,000 19,000 Retained earnings ............................... 1,953,675 1,918,090 1,745,716 ------------ ------------ ---------- Total retained earnings ...................... 1,972,675 1,937,090 1,764,716 ------------ ------------ ---------- $4,335,537 $4,908,579 $4,523,305 ============ ============ ==========
The accompanying notes are an integral part of the financial statements. F-23 MANAGEMENT ADJUSTMENT BUREAU, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
For the For the Years Ended Six Months December 31, Ended ----------------------------------------------- ------------- June 30, 1993 1994 1995 1996 ------------- -------------- ------------- ------------- Revenues .................................... $9,281,629 $11,183,167 $12,975,799 $6,776,290 Operating costs and expenses: Payroll and related expenses .............. 5,303,241 6,556,110 7,909,785 4,254,479 Selling, general and administrative expenses ............................... 3,425,653 3,624,489 4,138,523 2,421,714 Depreciation and amortization ............. 165,006 300,158 457,997 248,921 ------------- -------------- ------------- ------------- 8,893,900 10,480,757 12,506,305 6,925,114 ------------- -------------- ------------- ------------- Income (loss) from operations ............... 387,729 702,410 469,494 (148,824) ------------- -------------- ------------- ------------- Other income (expense): Interest expense .......................... (28,856) (31,065) (26,802) (30,262) Loss on disposal of assets ................ (72,389) (96,792) Miscellaneous income ...................... 2,848 1,656 12,115 6,712 Property write-down ....................... (78,600) ------------- -------------- ------------- ----------- Total other expense ................... (98,397) (29,409) (190,079) (23,550) ------------- -------------- ------------- ------------- Net income (loss) ........................... 289,332 673,001 279,415 (172,374) Retained earnings - beginning of year ....... 1,336,342 1,565,674 1,953,675 1,918,090 Distributions to shareholder ................ (60,000) (285,000) (315,000) ------------- -------------- ------------- ------------- Retained earnings - end of year ............. $1,565,674 $ 1,953,675 $ 1,918,090 $1,745,716 ============= ============== ============= =============
The accompanying notes are an integral part of the financial statements. F-24 MANAGEMENT ADJUSTMENT BUREAU, INC. STATEMENTS OF CASH FLOWS
For the Six For the Years Ended Months Ended December 31, June 30, ---------------------------------------- -------------- 1993 1994 1995 1996 ----------- ----------- ----------- -------------- Cash flows from operating activities: Net income (loss) $ 289,332 $ 673,001 $ 279,415 $(172,374) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 165,006 300,158 457,997 248,921 Loss on disposal of assets 72,389 96,792 Property write-down 78,600 Provision for doubtful accounts 30,000 17,000 33,420 12,388 Changes in assets and liabilities: Decrease (increase) in accounts receivable (352,768) 130,193 (417,380) 61,730 Decrease (increase) in prepaid expenses 10,558 (109,889) (16,615) 26,203 Decrease (increase) in cash value officer's life insurance 284 6,000 (417) (516) Increase in deposits (12,000) (4,200) (10,314) Increase (decrease) in accounts payable (15,867) (35,367) 50,821 31,018 Increase (decrease) in accrued expenses 123,436 (41,377) 103,770 97,079 Decrease in accrued profit sharing contributions (175,000) ----------- ----------- ----------- -------------- Total adjustments (141,962) 254,718 382,788 466,509 ----------- ----------- ----------- -------------- Net cash provided by operating activities 147,370 927,719 662,203 294,135 ----------- ----------- ----------- -------------- Cash flows from investing activities: Proceeds from sale of equipment 42,695 5,800 Purchases of equipment (488,186) (371,172) (637,419) (89,437) Repayment (issuance) of loans receivable 117 (50,000) (7,623) (32,276) Proceeds from sale of property 217,400 ----------- ----------- ----------- -------------- Net cash provided by (used in) investing activities (445,374) (421,172) (639,242) 95,687 ----------- ----------- ----------- -------------- Cash flows from financing activities: Repayment of loans (100,000) (193,324) (204,695) (561,719) Proceeds from loan agreements 200,000 100,000 300,000 400,000 Payment of stock redemption note (70,007) Proceeds from line-of-credit 150,000 Principal payments on capital leases (18,198) (47,428) (76,157) (42,946) Distributions to shareholders (60,000) (285,000) (315,000) ----------- ----------- ----------- -------------- Net cash used in financing activities (48,205) (425,752) (145,852) (204,665) ----------- ----------- ----------- -------------- Net increase (decrease) in cash (346,209) 80,795 (122,891) 185,157 Cash -- beginning of year 678,502 332,293 413,088 290,197 ----------- ----------- ----------- -------------- Cash -- end of year $ 332,293 $ 413,088 $ 290,197 $ 475,354 =========== =========== =========== ==============
The accompanying notes are an integral part of the financial statements. F-25 MANAGEMENT ADJUSTMENT BUREAU, INC. STATEMENTS OF CASH FLOWS, CONTINUED
For the Six For the Years Ended Months Ended December 31, June 30, ------------------------------------- -------------- 1993 1994 1995 1996 ---------- ---------- ---------- -------------- Supplemental disclosures of cash flow information: Cash paid for interest $36,975 $41,704 $ 43,042 $27,762 Cash paid for state income taxes $ 607 $15,715 $ 15,246 Noncash activities: Capital lease obligations entered into $89,139 $61,742 $237,121 Debt assumed for property held for sale $296,000
The accompanying notes are an integral part of the financial statements. F-26 MANAGEMENT ADJUSTMENT BUREAU, INC. Notes to Financial Statements NOTE 1. NATURE OF OPERATIONS Management Adjustment Bureau, Inc. ("MAB"), specializes in accounts receivable management and liquidation, with a concentration of university, guaranteed student loans, bank credit cards, utility, retail, commercial and health care customers. MAB has principal operations in Buffalo, New York and Denver, Colorado. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION MAB generates revenues from contingency fees and contractual services and revenue is recognized upon collection of funds on behalf of clients. CREDIT POLICY MAB has two types of arrangements under which it collects its contingency fee revenue. For certain clients, MAB remits funds collected on behalf of the client, net of the related contingency fees while, for other clients, MAB remits gross funds, collected on behalf of clients, and bills the client separately for its contingency fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In the event of collection delays from clients, management may at its discretion change from the gross remittance method to the net remittance method. ESTIMATES UTILIZED IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed over the estimated useful lives of the assets which range from three to thirty-nine years, using straight-line and accelerated methods. When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss on the transaction is included in the statement of income. INCOME TAXES MAB has elected to be treated as an S-Corporation for tax purposes. Accordingly, no provision will be made for income taxes by MAB since all income will be taxed directly to the shareholder of MAB. State taxes which are not significant are included in selling, general and administrative expenses. 3. CONCENTRATION OF CREDIT RISK At December 31, 1994, 1995 and June 30, 1996, MAB had bank deposits in excess of federally insured limits of approximately $2,322,000, $1,662,000 and $1,614,070, respectively. MAB's cash deposits have been placed with a large national bank to minimize risk. 4. LOANS RECEIVABLE In 1994, MAB loaned a former shareholder $50,000. Interest is payable in monthly installments of $333 at a fixed annual rate of eight percent. The loan is due in full on or before September 1, 1996. The note is unsecured. In 1995, MAB also extended various miscellaneous loans to employees. In 1996, MAB loaned $33,811 to a related party. The loan was assumed by the shareholder in August 1996. F-27 Management Adjustment Bureau, Inc. Notes to Financial Statements - (Continued) 5. FUNDS HELD IN TRUST FOR CLIENTS In the course of MAB's regular business activities as an accounts receivable management agency, MAB receives clients' funds arising from the collection of accounts placed with MAB. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. 6. DEMAND LOANS MAB has a $200,000 unsecured demand line-of-credit with a bank which carries interest at the prime rate less .25%. The demand loan balance at December 31, 1995 was $150,000. The demand loan balance was paid off in January 1996, at which time MAB borrowed $400,000 through an unsecured note from a related party. The related party note is due on demand and accrues interest at nine percent per year. MAB has an outstanding demand line-of-credit of $296,000 with PHH Real Estate Services Corporation at December 31, 1995. The line-of-credit is secured by an investment in real estate and due upon sale of the real estate. In May 1996, the real estate was sold and the line-of-credit was repaid and terminated. 7. PROPERTY AND EQUIPMENT Property and equipment, at cost, are as follows: December 31, ---------------------------- June 30, 1994 1995 1996 ------------ ------------ ------------ Computer equipment ...... $1,059,596 $1,341,432 $1,407,832 Furniture and fixtures .. 513,633 625,828 648,865 Capitalized leases ...... 150,881 388,002 388,002 ------------ ------------ ------------ 1,724,110 2,355,262 2,444,699 Less: Accumulated depreciation ........... 718,446 1,035,648 1,284,569 ------------ ------------ ------------ $1,005,664 $1,319,614 $1,160,130 ============ ============ ============ Depreciation charged to operations amounted to approximately $165,006, $300,158 and $457,997 in 1993, 1994 and 1995, respectively and $248,921 for the six months ended June 30, 1996 and included amortization of capital leases of approximately $-0-, $9,984 and $41,567 in 1993, 1994 and 1995, respectively and $29,629 for the six months ended June 30, 1996. F-28 Management Adjustment Bureau, Inc. Notes to Financial Statements - (Continued) 8. LONG-TERM DEBT Long-term debt is as follows:
December 31, -------------------------- June 30, 1994 1995 1996 ----------- ----------- ----------- Bank debt: Chemical Bank, collateralized by computer equipment. Monthly principal payments of $8,333 plus interest at 8.4% are due through April 1996. $ 133,333 $ 33,333 Chemical Bank, unsecured term loan. Monthly principal payments of $5,000 plus interest at 8% are due through November 2000. ........... 295,000 $ 265,000 M & T Bank, collateralized by computer equipment payments of $1,195, which include interest at 6.5%, are due through December 1996. ...... 206,676 106,979 54,593 ----------- ----------- ----------- 340,009 435,312 319,593 Capital Leases: AT&T Credit Corporation, telephone leases. Monthly lease payments of $3,084 and $2,039 which include interest and due through October 1998. ............................................................... 30,684 67,079 49,452 Steelcase Financial Services, office furniture lease. Monthly lease payments of $2,000 for the first 20 months; $3,000 for the next 40 months, which include interest and are due through June 2002. ....... 164,394 153,823 Data General Corporation, lease collateralized by computer equipment Monthly lease payments of $794, which include interest at 9.3%, are due through May 1996. ............................................... 12,598 3,878 Data General Corporation, lease collateralized by an optical imaging system Monthly payments of $2,758, which include interest at 7.1%, are due through April, 1996. ........................................ 41,974 10,870 ----------- ----------- 85,256 246,221 203,275 ----------- ----------- ----------- Total debt and capital leases ........................................ 425,265 681,533 522,868 Less: Current portion ................................................ (252,176) (271,456) (168,459) ----------- ----------- ----------- $ 173,089 $ 410,077 $ 354,409 =========== =========== ===========
The fair value of debt approximates the carrying value. Long-term debt and capital leases maturing during the next five years ending December 31, is approximately as follows: Debt Capital leases ---------- -------------- 1996 .................................... $200,750 $ 84,627 1997 .................................... 60,000 59,757 1998 .................................... 60,000 40,172 1999 .................................... 60,000 32,280 2000 .................................... 54,562 32,280 Thereafter .............................. -- 48,420 ---------- $435,312 297,536 ========== Less amounts representing interest ...... 51,315 -------------- Present value of net minimum lease payments ............................... $246,221 ============== F-29 Management Adjustment Bureau, Inc. Notes to Financial Statements - (Continued) The term loan agreement contains, among other provisions, requirements for maintaining defined levels of working capital, net worth and various financial ratios. MAB was in violation of covenants for which waivers were obtained. In May 1996, MAB established two unsecured lines-of-credit with a total availability of $1,000,000. Each line-of-credit carries variable interest based on the prime rate. One line-of-credit is collateralized by MAB's accounts receivables and specific equipment. 9. COMMITMENTS AND CONTINGENCIES MAB has operating leases for a building and automobiles which expire at various dates through 2010 with renewal privileges in some instances. Total rental expense under operating leases was approximately $344,500, $330,000 and $469,400 for 1993, 1994, and 1995, respectively and $227,500 for the six months ended June 30, 1996. Future minimum lease payments under operating leases through 2000 for the years ending December 31, are approximately: 1996 ......................... $ 416,900 1997.......................... 346,600 1998.......................... 324,900 1999.......................... 305,100 2000.......................... 310,700 MAB is involved in various legal issues. In the opinion of MAB's management, the ultimate cost individually or in the aggregate to resolve these matters will not have a material adverse effect on MAB's financial position, results of operations or cash flows beyond the reserves already established. Included in these reserves is an amount for $190,000 for a potential loss related to a specific contract. Management estimates the range of potential losses is between $-0- and $380,000 for this specific contract. Management is not aware of any other legal proceedings. 10. PROFIT SHARING PLAN MAB has a profit sharing plan with a 401(k) feature covering all qualified employees. MAB's contribution to this plan is a 50% match on the first 4% contributed by employees. MAB contributed $47,732, $50,531, and $50,805 in 1993, 1994, and 1995, respectively, to the Plan. MAB contributed $40,242 to the Plan for the six month period ended June 30, 1996. 11. MAJOR CUSTOMER MAB had revenues from a major customer of approximately 9% and 10% for the years ended December 31, 1994 and 1995, respectively and 13% for the six month period ended June 30, 1996. During August 1996, MAB was notified that it will not continue to provide certain services to this customer. 12. STOCK PURCHASE AGREEMENT In July 1996, the shareholder received a letter of intent from NCO Financial Systems to purchase MAB. MAB is currently pursuing the sale. F-30 REPORT OF INDEPENDENT AUDITORS TRANS UNION CORPORATION: We have audited the accompanying statements of net assets of the Trans Union Corporation Collections Division (the Collections Division) as of December 31, 1994 and 1995, and the related statements of operations and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the management of the Collections Division and Trans Union Corporation. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, the accompanying statements of net assets, operations, and cash flows include the assets, liabilities, revenues, expenses, and cash flows which are specifically identifiable with the Collections Division, as well as certain allocated expenses. These financial statements may not necessarily reflect the assets and liabilities and results of operations and cash flows of the Collections Division had it been operated as a stand-alone entity. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets of the Collections Division as of December 31, 1994 and 1995, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois January 16, 1996 F-31 TRANS UNION CORPORATION COLLECTIONS DIVISION STATEMENTS OF NET ASSETS (IN THOUSANDS)
DECEMBER 31, ---------------------- 1994 1995 --------- --------- Assets Current assets: Cash and cash equivalents ................................ $ 2,671 $ 1,733 Accounts receivable -- Trade, net of allowances of $20 in 1994 and 1995 ......................................... 931 614 Prepaid expenses and other current assets ................ 18 11 --------- --------- Total current assets ....................................... 3,620 2,358 Fixed assets: Equipment ................................................ 1,449 1,162 Leasehold improvements ................................... 13 -- Furniture and fixtures ................................... 261 302 Capitalized leased assets ................................ -- -- --------- ------- 1,723 1,464 Less: Accumulated depreciation and amortization .......... (1,457) (1,245) --------- ------- 266 219 Deposits ................................................... -- 10 --------- --------- Total assets ............................................... 3,886 2,587 Liabilities Accounts payable and accrued liabilities ................... 379 393 Current portion of capital lease obligation ................ -- -- Debtor payments owed clients ............................... 357 256 --------- --------- Total liabilities .......................................... 736 649 --------- --------- Net assets ................................................. $ 3,150 $ 1,938 ========= =========
See accompanying notes. F-32 TRANS UNION CORPORATION COLLECTIONS DIVISION STATEMENTS OF OPERATIONS (IN THOUSANDS) For the Years Ended December 31, ----------------------------------- 1993 1994 1995 --------- -------- -------- Revenue Service revenues .................... $7,770 $7,537 $7,467 Expenses Salaries and employee benefits ...... 3,746 3,090 2,888 Payroll and other taxes ............. 297 283 237 Depreciation and amortization ....... 324 287 198 Repairs and maintenance ............. 182 170 163 Corporate office charges ............ 62 124 117 Communications ...................... 521 438 391 Selling, general, and administrative 3,279 2,926 3,174 Other (income) expenses, net ........ 98 2 (5) --------- -------- -------- Total expenses ...................... 8,509 7,320 7,163 --------- -------- -------- Operating income (loss) ............. $ 739) $ 217 $ 304 ========= ======== ======== See accompanying notes. F-33 TRANS UNION CORPORATION COLLECTIONS DIVISION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the Years Ended December 31, --------------------------------- 1993 1994 1995 --------- -------- --------- Operating activities Operating income (loss) ..................................... $ (739) $ 217 $ 304 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization .......................... 324 287 198 (Gain) loss on fixed asset disposition ................. 87 -- (5) Provision for losses on accounts receivable ............ -- 1 5 Decrease (increase) in accounts receivable ............. 42 (184) 312 (Increase) decrease in prepaid expenses, other assets, and deposits ......................................... 12 1 (3) Increase (decrease) in accounts payable and accrued liabilities .......................................... 46 (40) 14 (Decrease) increase in debtor payments owed clients .... 61 (6) (101) --------- -------- --------- Net cash provided by (used in) operating activities ......... (167) 276 724 Investing activities Purchases of fixed assets ................................... (119) (85) (165) Proceeds from sale of fixed assets .......................... -- -- 15 --------- -------- --------- Net cash used in investing activities ....................... (119) (85) (150) Financing activities Net (distributions) contributions to parent company ......... 1,086 1,709 (1,512) Principal payments under capital lease obligations .......... (19) (50) -- --------- -------- --------- Net cash (used in) provided by financing activities ......... 1,067 1,659 (1,512) --------- -------- --------- Net (decrease) increase in cash and cash equivalents ........ 781 1,850 (938) Cash and cash equivalents at beginning of year .............. 40 821 2,671 --------- -------- --------- Cash and cash equivalents at end of year .................... $ 821 $2,671 $ 1,733 ========= ======== =========
See accompanying notes. F-34 TRANS UNION CORPORATION COLLECTIONS DIVISION NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS) 1. BUSINESS AND BASIS OF PRESENTATION The Trans Union Corporation Collections Division (the Collections Division) is a business unit of Trans Union Corporation (TUC) that provides various collection services. TUC is a wholly owned subsidiary of Marmon Industrial Corporation (MIC), and its ultimate parent company is Marmon Holdings, Inc. Substantially all of the stock of Marmon Holdings, Inc. is owned, directly or indirectly, by trusts for the benefit of the lineal descendants of Nicholas J. Pritzker, deceased, and entities controlled by such trusts. The Collections Division provides third-party debt collection services within the health care, utilities, and insurance markets. The principal markets are located in the states of Ohio, Pennsylvania, and Kansas. These financial statements present the historical assets, liabilities, revenues, expenses, and cash flows directly related to the operations of the Collections Division during the period presented. These financial statements are not necessarily indicative of the financial position and results of operations which would have occurred had the Collections Division been operated as an independent company; specifically, the financial statements do not include a provision for contingencies or income taxes. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. TUC and its Collections Division are part of a group that files a consolidated tax return. There is no tax-sharing agreement for allocating income taxes to the Collections Division. Accordingly, the financial statements do not reflect any income tax expense or benefit. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Service revenues are recognized when debtor payments are received. FIXED ASSETS Fixed assets are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets beginning in the month following acquisition. CASH AND CASH EQUIVALENTS The Collections Division considers cash and cash equivalents to consist of cash on hand and all highly liquid debt instruments purchased with a maturity of three months or less, if any. MIC provides a centralized cash management function; accordingly, the Collections Division does not maintain separate operating cash accounts, and its cash disbursements and the majority of its collections of client revenues are settled to the TUC and MIC cash concentrator accounts. Therefore, certain parent company transactions are deemed to be cash transactions for purposes of the statement of cash flows. 3. RELATED PARTY TRANSACTIONS TUC provides certain common general management services to the Collections Division including accounting, legal, and cash management services. The amount charged to the Collections Division for these services totaled $62, $124, and $117 for the years ended December 31, 1993, 1994, and 1995, respectively. F-35 TRANS UNION CORPORATION COLLECTIONS DIVISION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 4. PROFIT-SHARING AND EMPLOYEE SAVING PLANS The Collections Division employees are part of a MIC mixed savings and profit-sharing plan. All employees with at least one year of continuing service are eligible for participation in the plan. Each participant's contribution is matched in part by MIC up to a maximum of 6% of the participant's annual compensation. Employee savings plans expense was approximately $151, $194, and $139 for the years ended December 31, 1993, 1994, and 1995, respectively. 5. LEASES As lessee, the Collections Division shares leased office facilities with TUC and leased equipment under noncancelable operating lease agreements expiring January 31, 2005. Total rent expense under such operating leases based on a square foot allocation for the office facilities and actual usage for office equipment was $146, $171, and $162 for the years ended December 31, 1993, 1994, and 1995, respectively. A summary by year of future minimum lease payments that would be allocable to the Collections Division under noncancelable operating leases as of December 31, 1995, is shown below. Year ending December 31: 1996 $139 1997 72 1998 70 1999 70 2000 70 2001 and beyond 164 ----- $585 ===== 6. MAJOR CUSTOMERS Bell Atlantic represented more than 10% of the combined revenue of the Collections Division or $1,216, $1,423, and $1,586 for the years ended December 31, 1993, 1994, and 1995, respectively. F-36 ================================================================================ No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with the Offering other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction where such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company, or that information contained herein is correct as of any time, subsequent to the date hereof. ------ TABLE OF CONTENTS ------ Page -------- Prospectus Summary ................................ 3 Risk Factors ...................................... 8 Acquisition History ............................... 13 Use of Proceeds ................................... 16 Dividend Policy and Prior S Corporation Status .... 16 Capitalization .................................... 17 Dilution .......................................... 18 Selected Financial and Operating Data ............. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 21 Business .......................................... 28 Management ........................................ 36 Certain Transactions .............................. 41 Principal and Selling Shareholders ................ 42 Description of Capital Stock ...................... 43 Shares Eligible for Future Sale ................... 46 Underwriting ...................................... 47 Legal Matters ..................................... 48 Experts ........................................... 48 Additional Information ............................ 48 Index to Financial Statements ..................... F-1 Until , 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ================================================================================ ================================================================================ 2,500,000 SHARES [COMPANY LOGO] COMMON STOCK ------ PROSPECTUS ------ MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. , 1996 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the expenses in connection with the issuance and distribution of the securities being registered, all of which are being borne by the Registrant. Securities and Exchange Commission Registration Fee.. $ 12,888 National Association of Securities Dealers, Inc. Fee 4,238 Nasdaq Listing Fee ................................. 34,284 Printing and Engraving Expenses .................... 100,000 Accounting Fees and Expenses ....................... 350,000 Legal Fees and Expenses ............................ 300,000 Blue Sky Qualification Fees and Expenses ........... 25,000 Transfer Agent and Registrar Fees and Expenses ..... 10,000 Consulting Fee ..................................... 240,000 Miscellaneous ...................................... 73,590 ----------- Total ............................................. $1,150,000 =========== The foregoing, except for the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. fee and the Nasdaq listing fee, are estimates. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for mandatory and discretionary indemnification of a corporation's directors, officers and other personnel, and related matters. Under Section 1741, subject to certain limitations, a corporation has the power to indemnify directors and officers under certain prescribed circumstances against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with an action or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his being a representative, director or officer of the corporation or serving at the request of the corporation as a representative of another corporation, partnership, joint venture, trust or other enterprise, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Under Section 1743, indemnification is mandatory to the extent that the officer or director has been successful on the merits or otherwise in defense of any action or proceeding if the appropriate standards of conduct are met. Section 1742 provides for indemnification in derivative actions except in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the corporation unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. Section 1744 provides that, unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the corporation only as authorized in the specific case upon a determination that the representative met the applicable standard of conduct, and such determination will be made by the board of directors (i) by a majority vote of a quorum of directors not parties to the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable and a majority of disinterested directors so directs, by independent legal counsel; or (iii) by the shareholders. II-1 Section 1745 provides that expenses (including attorney's fees) incurred by an officer, director, employee or agent in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 1746 provides generally that, except in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, the indemnification and advancement of expenses provided by Subchapter 17D of the BCL shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office. Section 1747 grants to a corporation the power to purchase and maintain insurance on behalf of any director or officer against any liability incurred by him or her in his or her capacity as officer or director, whether or not the corporation would have the power to indemnify him or her against the liability under Subchapter 17D of the BCL. Section 1748 and 1749 extend the indemnification and advancement of expenses provisions contained in Subchapter 17D of the BCL to successor corporations in fundamental changes and to representatives serving as fiduciaries of employee benefit plans. Section 1750 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and personal representative of such person. For information regarding provisions under which a director or officer of the Company may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to the Company's Articles of Incorporation and Bylaws, copies of which are filed as Exhibits 3.1 and 3.2, respectively, which provide in general that the Company shall indemnify its officers and directors to the fullest extent authorized by law. Reference is also made to Section 11 of the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In connection with the Company's purchase of certain assets of B. Richard Miller, Inc. in April, 1994, the Company issued 123,803 shares of Common Stock to the seller. In addition, Bernard Miller, the principal shareholder of the seller, received an option to purchase up to an additional 86,881 shares of Common Stock, which option was exercised in 1995. These transactions were made in reliance on the exemption from the registration requirements provided by Section 4(2) of the Securities Act. In July 1995, the Company issued a warrant to purchase an aggregate of 175,531 shares of the Company's Common Stock to Mellon Bank, N.A. in connection with its Credit Agreement. The warrant expires on July 31, 2005 and provides for exercise at a nominal price. The Company issued a warrant to purchase an additional 46,560 shares of Common Stock to Mellon Bank, N.A. upon the amendment of the Credit Agreement in September 1996. This warrant expires on July 31, 2005 and provide for an exercise price per share equal to the initial pubic offering price. All of the warrants were issued in reliance upon the exemption from the registration requirements provided by Section 4(2) of the Securities Act. Pursuant to the Company's 1995 Stock Option Plan, in June, 1995 and September, 1996, respectively, the Company issued options to purchase an aggregate of 367,321 shares of Common Stock to certain executive officers and key employees. All of the options were issued in connection with such employee's employment with the Company and no cash or other consideration was received by the Company in exchange for such options. The options were issued in reliance upon the exemption from the registration requirements provided by Rule 701 under the Securities Act. In September 1996, the Company issued one share of Common Stock of the Company in exchange for each outstanding share of common stock of NCO Financial and NCO Financial became a wholly-owned subsidiary of the Company. The stock was issued without registration under the Securities Act in reliance upon Rule 145(a)(2) promulgated under the Securities Act and the interpretations thereunder. II-2 In September 1996, the Company acquired all of the outstanding stock of MAB. As part of the purchase price, the Company issued a Convertible Note in the aggregate principal amount of $1.0 million. This note is convertible into 83,333 shares of Common Stock at the assumed initial public offering price of $12.00 per share. The note was issued in reliance on the exemption from the registration requirements provided by Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
Exhibit No. Description --------------- ------------ *1.1 Form of Underwriting Agreement (draft of September 3, 1996). 2.1 Stock Purchase Agreement, by and among the Company; and Craig Costanzo and Andrew J. Boyuka, as Trustee of the Susan E. Costanzo Grantor Trust and Christopher A. Costanzo Grantor Trust, relating to the acquisition of MAB. 2.2 Asset Purchase Agreement dated December 8, 1995 by and between the Company and Trans Union Corporation. *3.1 The Company's amended and restated Articles of Incorporation. *3.2 The Company's amended and restated Bylaws. *4.1 Specimen of Common Stock Certificate. *5.1 Opinion of Blank Rome Comisky & McCauley. *10.1 Employment Agreement, dated September 1, 1996, between the Company and Bernard R. Miller. *10.2 Employment Agreement, dated September 1, 1996, between the Company and Michael J. Barrist. *10.3 Employment Agreement, dated September 1, 1996, between the Company and Charles C. Piola, Jr. *10.4 Employment Agreement, dated September 1, 1996, between the Company and Joseph C. McGowan. *10.5 Employment Agreement, dated September 1, 1996, between the Company and Steven L. Winokur. 10.6 Agreements of Lease dated May 9, 1995, as amended, between the Company and 1710-20 Sentry East Associates, L.P., relating to the offices located at 1710 Walton Road, Blue Bell, Pennsylvania. 10.7 Agreements of Lease dated July 1, 1993 between the Company and 1740 Sentry East Associates, L.P., relating to the offices located at 1740 Walton Road, Blue Bell, Pennsylvania. *10.8 Lease Agreement by and between The Uniland Partnership, L.P. and Management Adjustment Bureau, Inc., as amended by First Amendment to Lease, dated December 10, 1994, as further amended by Second Amendment to Lease, dated December 10, 1994. 10.9 Software License Agreement and Software Purchase Agreement, by and between the Company and CRSoftware, Inc., relating to computer software (CRS Credit Bureau Reporting Software) and computerhardware. *10.10 Amended and Restated 1995 Stock Option Plan. *10.11 1996 Stock Option Plan. *10.12 1996 Non-Employee Director Stock Option Plan. 10.13 Amended and Restated Credit Agreement by and among the Company, its subsidiaries and Mellon Bank, N.A., dated September 5, 1996. 10.14 Amended and Restated Security Agreement, dated September 5, 1996, by and among the Company, its subsidiaries and Mellon Bank, N.A. 10.15 Warrant Agreement, dated July 28, 1995, by and between the Company and Mellon Bank, N.A. and Amendment dated September 5, 1996. 10.16 1996 Warrant Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N.A. 10.17 Amended and Restated Registration Rights Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N.A. 10.18 Amended and Restated Limited Guaranty Agreement, dated September 5, 1996, made by Michael J. Barrist, Charles C. Piola, Jr., Annette H. Barrist and Bernard R. Miller in favor of Mellon Bank, N.A.
- ------ *Filed herewith. II-3
Exhibit No. Description --------------- ------------ 10.19 Amended and Restated Stock Pledge Agreement, dated September 5, 1996 made by Michael J. Barrist, Charles C. Piola, Jr., Annette H. Barrist, and Bernard R. Miller, in favor of Mellon Bank, N.A. 10.20 Stock Pledge Agreement, dated as of September 5, 1996 made by NCO of New York, Inc. in favor of Mellon Bank, N.A. 10.21 Convertible Note dated September 1, 1996, made by the Company in the principal amount of $1,000,000, as partial payment of the purchase price for the acquisition of MAB. 10.22 Distribution and Tax Indemnification Agreement *10.23 Irrevocable Proxy Agreement by and between Michael J. Barrist and Annette H. Barrist. *10.24 Common Stock Purchase Warrant for 175,531 shares issued to Mellon Bank, N.A. *10.25 Common Stock Purchase Warrant for 46,560 shares issued to Mellon Bank, N.A. *10.26 Commitment Letter dated September 6, 1996 issued by Mellon Bank, N.A. *10.27 Indemnification Agreement by and between NCO Financial Systems, Inc., Management Adjustment Bureau, Inc. and Craig Costanzo. 21.1 Subsidiaries of the Registrant. *23.1 Consent of Coopers & Lybrand L.L.P. *23.2 Consent of Ernst & Young LLP. *23.3 Consent of Blank Rome Comisky & McCauley (included in the opinion filed as Exhibit 5.1 hereto). 24.1 Power of Attorney of directors and officers (included on Page II-5). 27.1 Financial Data Schedules. *99.1 Consent of Eric Siegel to be named as a director. *99.2 Consent of Allen Wise to be named as a director.
- ------ *Filed herewith. (b) Financial Statement Schedules ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned hereby undertakes: (1) to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser; (2) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Blue Bell, Pennsylvania, on October 16, 1996. NCO GROUP, INC. By: --------------------------------- /s/ Michael J. Barrist Michael J. Barrist, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Michael J. Barrist Chairman of the Board, October 16 , 1996 - ---------------------------------- President and Chief Executive Michael J. Barrist Officer (principal executive officer) * - ---------------------------------- Executive Vice President and October 16, 1996 Charles C. Piola, Jr. Director /s/ Steven L. Winokur Vice President of Finance, October 16, 1996 - ---------------------------------- Chief Financial Officer and Steven L. Winokur Treasurer (principal financial and accounting officer) * - ---------------------------------- Senior Vice President, October 16, 1996 Bernard R. Miller Development and Director *By: /s/ Michael J. Barrist - --------------------------------- Michael J. Barrist Power of Attorney
II-5 EXHIBIT INDEX
Exhibit No. Description Page ---------- ------------ -------- *1.1 Form of Underwriting Agreement (draft of September 3, 1996). 2.1 Stock Purchase Agreement, by and among the Company; and Craig Costanzo and Andrew J. Boyuka, as Trustee of the Susan E. Costanzo Grantor Trust and Christopher A. Costanzo Grantor Trust, relating to the acquisition of MAB. 2.2 Asset Purchase Agreement dated December 8, 1995 by and between the Company and Trans Union Corporation. *3.1 The Company's amended and restated Articles of Incorporation. *3.2 The Company's amended and restated Bylaws. *4.1 Specimen of Common Stock Certificate. *5.1 Opinion of Blank Rome Comisky & McCauley. *10.1 Employment Agreement, dated September 1, 1996, between the Company and Bernard R. Miller. *10.2 Employment Agreement, dated September 1, 1996, between the Company and Michael J. Barrist. *10.3 Employment Agreement, dated September 1, 1996, between the Company and Charles C. Piola, Jr. *10.4 Employment Agreement, dated September 1, 1996, between the Company and Joseph C. McGowan. *10.5 Employment Agreement, dated September 1, 1996, between the Company and Steven L. Winokur. 10.6 Agreements of Lease dated May 9, 1995, as amended, between the Company and 1710-20 Sentry East Associates, L.P., relating to the offices located at 1710 Walton Road, Blue Bell, Pennsylvania. 10.7 Agreements of Lease dated July 1, 1993 between the Company and 1740 Sentry East Associates, L.P., relating to the offices located at 1740 Walton Road, Blue Bell, Pennsylvania. *10.8 Lease Agreement by and between The Uniland Partnership, L.P. and Management Adjustment Bureau, Inc., as amended by First Amendment to Lease, dated December 10, 1994, as further amended by Second Amendment to Lease, dated December 10, 1994. 10.9 Software License Agreement and Software Purchase Agreement, by and between the Company and CRSoftware, Inc., relating to computer software (CRS Credit Bureau Reporting Software) and computerhardware. *10.10 Amended and Restated 1995 Stock Option Plan. *10.11 1996 Stock Option Plan. *10.12 1996 Non-Employee Director Stock Option Plan. 10.13 Amended and Restated Credit Agreement by and among the Company, its subsidiaries and Mellon Bank, N.A., dated September 5, 1996. 10.14 Amended and Restated Security Agreement, dated September 5, 1996, by and among the Company, its subsidiaries and Mellon Bank, N.A. 10.15 Warrant Agreement, dated July 28, 1995, by and between the Company and Mellon Bank, N.A. and Amendment dated September 5, 1996. 10.16 1996 Warrant Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N.A. 10.17 Amended and Restated Registration Rights Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N.A. 10.18 Amended and Restated Limited Guaranty Agreement, dated September 5, 1996, made by Michael J. Barrist, Charles C. Piola, Jr., Annette H. Barrist and Bernard R. Miller in favor of Mellon Bank, N.A.
- ------ *Filed herewith.
Exhibit No. Description Page ---------- ------------ -------- 10.19 Amended and Restated Stock Pledge Agreement, dated September 5, 1996 made by Michael J. Barrist, Charles C. Piola, Jr., Annette H. Barrist, and Bernard R. Miller, in favor of Mellon Bank, N.A. 10.20 Stock Pledge Agreement, dated as of September 5, 1996 made by NCO of New York, Inc. in favor of Mellon Bank, N.A. 10.21 Convertible Note dated September 1, 1996, made by the Company in the principal amount of $1,000,000, as partial payment of the purchase price for the acquisition of MAB. 10.22 Distribution and Tax Indemnification Agreement *10.23 Irrevocable Proxy Agreement by and between Michael J. Barrist and Annette H. Barrist. *10.24 Common Stock Purchase Warrant for 175,531 shares issued to Mellon Bank, N.A. *10.25 Common Stock Purchase Warrant for 46,560 shares issued to Mellon Bank, N.A. *10.26 Commitment Letter dated September 6, 1996 issued by Mellon Bank, N.A. *10.27 Indemnification Agreement by and between NCO Financial Systems, Inc., Management Adjustment Bureau, Inc. and Craig Costanzo. 21.1 Subsidiaries of the Registrant. *23.1 Consent of Coopers & Lybrand L.L.P. *23.2 Consent of Ernst & Young LLP. *23.3 Consent of Blank Rome Comisky & McCauley (included in the opinion filed as Exhibit 5.1 hereto). 24.1 Power of Attorney of directors and officers (included on Page II-5). 27.1 Financial Data Schedules. *99.1 Consent of Eric Siegel to be named as a director. *99.2 Consent of Allen Wise to be named as a director.
- ------ *Filed herewith. EX-1 2 EXHIBIT 1.1 Draft dated 9/3/96 2,500,000 Shares NCO GROUP, INC. Common Stock UNDERWRITING AGREEMENT __________, 1996 MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. As Representatives of the several Underwriters c/o MONTGOMERY SECURITIES 600 Montgomery Street San Francisco, California 94111 Dear Sirs: SECTION 1. Introductory. NCO Group, Inc., a Pennsylvania corporation (the "Company"), proposes to issue and sell 2,500,000 shares of its authorized but unissued Common Stock (the "Common Stock") to the several underwriters named in Schedule A annexed hereto (the "Underwriters"), for whom you are acting as Representatives. Said aggregate of 2,500,000 shares are herein called the "Firm Common Shares." In addition, certain stockholders of the Company named in Schedule B annexed hereto (the "Selling Stockholders") propose to grant to the Underwriters an option to purchase up to 375,000 additional shares of Common Stock (the "Optional Common Shares"), as provided in Section 5 hereof. The Firm Common Shares and, to the extent such option is exercised, the Optional Common Shares are hereinafter collectively referred to as the "Common Shares." You have advised the Company and the Selling Stockholders that the Underwriters propose to make a public offering of their respective portions of the Common Shares on the effective date of the registration statement hereinafter referred to, or as soon thereafter as in your judgment is advisable. The Company and each of the Selling Stockholders hereby confirm their respective agreements with respect to the purchase of the Common Shares by the Underwriters as follows: SECTION 2. Representations and Warranties of the Company and the Selling Stockholders. The Company and each of the Selling Stockholders (with the exception of Annette Barrist) severally represent and warrant to the several Underwriters that: (a) A registration statement on Form S-1 (File No. 333-___) with respect to the Common Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The Company has prepared and has filed or proposes to file prior to the effective date of such registration statement an amendment or amendments to such registration statement, which amendment or amendments have been or will be similarly prepared. There have been delivered to you two signed copies of such registration statement and amendments, together with two copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus have been delivered to you in such reasonable quantities as you have requested for each of the Underwriters. The Company will next file with the Commission one of the following: (i) prior to effectiveness of such registration statement, a further amendment thereto, including the form of final prospectus, (ii) a final prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations. As filed, such amendment and form of final prospectus, or such final prospectus, shall include all Rule 430A Information and, except to the extent that you shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement was executed and delivered by the parties hereto, or, to the extent not completed at such date and time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Company shall have previously advised you in writing would be included or made therein. The term "Registration Statement" as used in this Agreement shall mean such registration statement at the time such registration statement becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the First Closing Date (as hereinafter defined), shall also mean such registration statement as so amended; provided, however, that such term shall also include (i) all Rule 430A Information deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A of the Rules and Regulations and (ii) any registration statement filed pursuant to 462(b) of the Rules and Regulations relating to the Common Shares. The term "Preliminary Prospectus" shall mean any preliminary prospectus referred to in the preceding paragraph and any preliminary prospectus included in the Registration Statement at the time it becomes effective that omits Rule 430A Information. The term "Prospectus" as used in this Agreement shall mean either (i) the prospectus relating to the Common Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or (ii) if no filing pursuant to Rule 424(b) of the Rules and Regulations is required, shall mean the form of final prospectus included in the Registration Statement at the time such registration statement becomes effective. The term "Rule 430A Information" means information with respect to the Common Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the Rules and Regulations. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including each Closing Date hereinafter mentioned, the Registration Statement and the Prospectus, and any amendments or supplements thereto, will contain all material statements and information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, no representation or warranty contained in this subsection 2(b) shall be applicable to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter, directly or through the Representatives, specifically for use in the preparation thereof. (c) The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Registration Statement. The Company and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, with full power and authority (corporate and other) to own and lease their properties and conduct their respective businesses as described in the Prospectus; the Company owns all of the outstanding capital stock of its subsidiaries free and clear of all claims, liens, charges and encumbrances; the Company and each of its subsidiaries are in possession of and operating in compliance with all authorizations, licenses, permits, consents, certificates and orders material to the conduct of their respective businesses, all of which are valid and in full force and effect; the Company and each of its subsidiaries are duly qualified to do business and in good standing as foreign corporations in each jurisdiction in which the ownership or leasing of properties or the conduct of their respective businesses requires such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect upon the Company or the subsidiary; and no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (d) The Company has an authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus; the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and conform to the description thereof contained in the Prospectus. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (e) The Common Shares to be sold by the Company have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be duly authorized, validly issued, fully paid and nonassessable, and will conform to the description thereof contained in the Prospectus. No preemptive rights or other rights to subscribe for or purchase exist with respect to the issuance and sale of the Common Shares by the Company pursuant to this Agreement. No stockholder of the Company has any right which has not been waived to require the Company to register the sale of any shares owned by such stockholder under the Act in the public offering contemplated by this Agreement. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Common Shares to be sold by the Company or the transfer and sale of the Common Shares to be sold by the Selling Stockholders as contemplated herein. (f) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company in accordance with its terms. The making and performance of this Agreement by the Company and the consummation of the transactions herein contemplated will not violate any provisions of the articles of incorporation or bylaws, or other organizational documents, of the Company or any of its subsidiaries, and will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of its respective properties may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of its subsidiaries or any of its respective properties. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for compliance with the Act, the Blue Sky laws applicable to the public offering of the Common Shares by the several Underwriters and the clearance of such offering with the National Association of Securities Dealers, Inc. (the "NASD"). (g) Coopers & Lybrand, who have expressed their opinion with respect to the financial statements and schedules of the Company and Management Adjustment Bureau, Inc. ("MAB") filed with the Commission as a part of the Registration Statement and included in the Prospectus and in the Registration Statement, are independent accountants as required by the Act and the Rules and Regulations. Ernst & Young LLP, who have expressed their opinion with respect to the financial statements and schedules of Trans Union Corporation Collections Division ("TCD") filed with the Commission as a part of the Registration Statement and included in the Prospectus and in the Registration Statement, are independent accountants as required by the Act and the Rules and Regulations. (h) The financial statements and schedules of the Company, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the respective dates of such financial statements and schedules, and the results of operations and changes in financial position of the Company for the respective periods covered thereby. The financial statements and schedules of MAB, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of MAB as of the respective dates of such financial statements and schedules, and the results of operations and changes in financial position of MAB for the respective periods covered thereby. The financial statements and schedules of TCD, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of TCD as of the respective dates of such financial statements and schedules, and the results of operations and changes in financial position of TCD for the respective periods covered thereby. Such statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis as certified by the independent accountants named in subsection 2(g). No other financial statements or schedules are required to be included in the Registration Statement. The selected financial data set forth in the Prospectus under the captions "Capitalization" and "Selected Financial and Operating Data" fairly present the information set forth therein on the basis stated in the Registration Statement. (i) The pro forma consolidated financial statements and other pro forma financial information of the Company included in the Prospectus have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma basis described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (j) Except as disclosed in the Prospectus, and except as to defaults which individually or in the aggregate would not be material to the Company, neither the Company nor any of its subsidiaries is in violation or default of any provision of its articles of incorporation or bylaws, or other organizational documents, or is in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties are bound; and there does not exist any state of facts which constitutes an event of default on the part of the Company or any such subsidiary as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default. (k) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. The contracts so described in the Prospectus are accurate and complete; all such contracts are in full force and effect on the date hereof; and neither the Company nor any of its subsidiaries, nor to the best of the Company's knowledge, any other party is in breach of or default under any of such contracts. (l) There are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened to which the Company or any of its subsidiaries is or may be a party or of which property owned or leased by the Company or any of its subsidiaries is or may be the subject, or related to environmental or discrimination matters, which actions, suits or proceedings might, individually or in the aggregate, prevent or adversely affect the transactions contemplated by this Agreement or result in a material adverse change in the condition (financial or otherwise), properties, business, results of operations or prospects of the Company and its subsidiaries; and no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent which might be expected to affect adversely such condition, properties, business, results of operations or prospects. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. (m) The Company or the applicable subsidiary has good and marketable title to all the properties and assets reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such financial statements (or elsewhere in the Prospectus), or (ii) those which are not material in amount and do not adversely affect the use made and proposed to be made of such property by the Company and its subsidiaries. The Company or the applicable subsidiary holds its leased properties under valid and binding leases, with such exceptions as are not materially significant in relation to the business of the Company. Except as disclosed in the Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted. (n) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or specifically contemplated by the Prospectus: (i) the Company and its subsidiaries have not incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company and its subsidiaries; (ii) the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company and its subsidiaries are not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than upon the sale of the Common Shares hereunder) or indebtedness material to the Company and its subsidiaries (other than in the ordinary course of business); and (v) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries. (o) Except as disclosed in or specifically contemplated by the Prospectus, the Company and its subsidiaries have sufficient trademarks, trade names, patent rights, mask works, copyrights, licenses, approvals and governmental authorizations to conduct their businesses as now conducted; the expiration of any trademarks, trade names, patent rights, mask works, copyrights, licenses, approvals or governmental authorizations would not have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company or its subsidiaries; and the Company has no knowledge of any material infringement by it or its subsidiaries of trademark, trade name rights, patent rights, mask works, copyrights, licenses, trade secret or other similar rights of others, and there is no claim being made against the Company or its subsidiaries regarding trademark, trade name, patent, mask work, copyright, license, trade secret or other infringement which could have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company and its subsidiaries. (p) The Company has not been advised, and has no reason to believe, that either it or any of its subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, the federal Fair Debt Collection Practices Act, the federal Fair Credit Reporting Act, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, the federal Telephone Consumer Protection Act of 1991, related state and local statutes and regulations and all applicable local, state and federal environmental laws and regulations; except where failure to be so in compliance would not materially adversely affect the condition (financial or otherwise), business, results of operations or prospects of the Company and its subsidiaries. (q) The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown as due thereon; and the Company has no knowledge of any tax deficiency which has been or might be asserted or threatened against the Company or its subsidiaries which could materially and adversely affect the business, operations or properties of the Company and its subsidiaries. (r) The Company is not, and will not become as a result of the consummation of the transactions contemplated by this Agreement and application of the net proceeds therefrom as described in the Prospectus, an "investment company" within the meaning of the Investment Company Act of 1940, as amended and the rules and regulations of the Commission thereunder. (s) The Company has not distributed and will not distribute prior to the First Closing Date any offering material in connection with the offering and sale of the Common Shares other than the Prospectus, the Registration Statement and the other materials permitted by the Act. (t) Each of the Company and its subsidiaries maintain insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (u) Neither the Company nor any of its subsidiaries has at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (v) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (w) The Recapitalization (as defined in the Prospectus) has been consummated pursuant to the terms described therein. (x) The agreements necessary to effect the acquisition of MAB have been duly authorized, executed and delivered by each of the parties thereto and constitute the valid, legal and binding agreements of each such party, and the acquisition of all of the capital stock of MAB by the Company and the related transactions contemplated thereby have been consummated pursuant to the terms described in the Prospectus. SECTION 3. Representations, Warranties and Covenants of the Selling Stockholders. (a) Each of the Selling Stockholders represents and warrants to, and agrees with, the several Underwriters that: (i) Such Selling Stockholder has, and on the Second Closing Date hereinafter mentioned will have, good and marketable title to the Common Shares proposed to be sold by such Selling Stockholder hereunder on such Closing Date and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver such Common Shares hereunder, free and clear of all voting trust arrangements, liens, encumbrances, equities, security interests, restrictions and claims whatsoever; and upon delivery of and payment for such Common Shares hereunder, the Underwriters will acquire good and marketable title thereto, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts or other defects of title whatsoever. (ii) Such Selling Stockholder has executed and delivered a Power of Attorney and caused to be executed and delivered on his behalf a Custody Agreement (hereinafter collectively referred to as the "Stockholders Agreement") and in connection herewith such Selling Stockholder further represents, warrants and agrees that such Selling Stockholder has deposited in custody, under the Stockholders Agreement, with the agent named therein (the "Agent") as custodian, certificates in negotiable form for the Common Shares to be sold hereunder by such Selling Stockholder, for the purpose of further delivery pursuant to this Agreement. Such Selling Stockholder agrees that the Common Shares to be sold by such Selling Stockholder on deposit with the Agent are subject to the interests of the Company and the Underwriters, that the arrangements made for such custody are to that extent irrevocable, and that the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Stockholders Agreement, by any act of such Selling Stockholder, by operation of law, by the death or incapacity of such Selling Stockholder or by the occurrence of any other event. If the Selling Stockholder should die or become incapacitated, or if any other event should occur, before the delivery of the Common Shares hereunder, the documents evidencing Common Shares then on deposit with the Agent shall be delivered by the Agent in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Agent shall have received notice thereof. This Agreement and the Stockholders Agreement have been duly executed and delivered by or on behalf of such Selling Stockholder and the form of such Stockholders Agreement has been delivered to you. (iii) The performance of this Agreement and the Stockholders Agreement and the consummation of the transactions contemplated hereby and by the Stockholders Agreement will not result in a breach or violation by such Selling Stockholder of any of the terms or provisions of, or constitute a default by such Selling Stockholder under, any indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder or any of its properties is bound, any statute, or any judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to such Selling Stockholder or any of its properties. (iv) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Shares. (v) Each Preliminary Prospectus and the Prospectus, insofar as it has related to such Selling Stockholder has conformed in all material respects to the requirements of the Act and the Rules and Regulations and has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made; and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as it relates to such Selling Stockholder, will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (b) Annette Barrist represents and warrants to the several Underwriters that she is not aware that any of the representations or warranties set forth in Section 2 above is untrue or inaccurate in any material respect. (c) Each of the Selling Stockholders agrees with the Company and the Underwriters not to offer to sell, sell or contract to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable for any shares of Common Stock, for a period of 180 days after the first date that any of the Common Shares are released by you for sale to the public, without the prior written consent of either Montgomery Securities or each of the Representatives, which consent may be withheld at the sole discretion of Montgomery Securities or each of the Representatives, as the case may be. SECTION 4. Representations and Warranties of the Underwriters. The Representatives, on behalf of the several Underwriters, represent and warrant to the Company and to the Selling Stockholders that the information set forth (i) on the cover page of the Prospectus with respect to price, underwriting discounts and commissions and terms of offering and (ii) under "Underwriting" in the Prospectus was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus and is correct in all material respects. The Representatives represent and warrant that they have been authorized by each of the other Underwriters as the Representatives to enter into this Agreement on its behalf and to act for it in the manner herein provided. SECTION 5. Purchase, Sale and Delivery of Common Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, (i) the Company agrees to issue and sell to the Underwriters 2,500,000 Firm Common Shares. The Underwriters agree, severally and not jointly, to purchase from the Company the number of Firm Common Shares described below. The purchase price per share to be paid by the several Underwriters to the Company shall be $___ per share. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of full shares which (as nearly as practicable, as determined by you) bears to __________ the same proportion as the number of shares set forth opposite the name of such Underwriter in Schedule A hereto bears to the total number of Firm Common Shares. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed upon by the Company and the Representatives) at such time and date, not later than the third (or, if the Firm Common Shares are priced, as contemplated by Rule 15c6-1(c) under the Securities Exchange Act of 1934, after 4:30 P.M. Washington D.C. time, the fourth) full business day following the first date that any of the Common Shares are released by you for sale to the public, as you shall designate by at least 48 hours prior notice to the Company (the "First Closing Date"); provided, however, that if the Prospectus is at any time prior to the First Closing Date recirculated to the public, the First Closing Date shall occur upon the later of the third or fourth, as the case may be, full business day following the first date that any of the Common Shares are released by you for sale to the public or the date that is 48 hours after the date that the Prospectus has been so recirculated. Delivery of certificates for the Firm Common Shares shall be made by or on behalf of the Company to you, for the respective accounts of the Underwriters against payment by you, for the accounts of the several Underwriters, of the purchase price therefor by a wire transfer of immediately available funds to an account designated by the Company. The certificates for the Firm Common Shares shall be registered in such names and denominations as you shall have requested at least two full business days prior to the First Closing Date, and shall be made available for checking and packaging on the business day preceding the First Closing Date at a location in New York, New York, as may be designated by you. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Selling Stockholders hereby grant an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 375,000 Optional Common Shares at the purchase price per share to be paid for the Firm Common Shares, for use solely in covering any over-allotments made by you for the account of the Underwriters in the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the first date that any of the Common Shares are released by you for sale to the public, upon notice by you to the Agent setting forth the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, the names and denominations in which the certificates for such shares are to be registered and the time and place at which such certificates will be delivered. If the option granted hereby is exercised for less than the maximum number of Optional Common Shares being offered by the Selling Stockholders, the respective number of Optional Common Shares to be sold by each of the Selling Stockholders listed on Schedule B annexed hereto shall be determined on a pro rata basis in accordance with the number of shares set forth opposite their names on Schedule B hereto, adjusted by you in such manner as to avoid fractional interests. Such time of delivery (which may not be earlier than the First Closing Date), being herein referred to as the "Second Closing Date," shall be determined by you, but if at any time other than the First Closing Date shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. The number of Optional Common Shares to be purchased by each Underwriter shall be determined by multiplying the number of Optional Common Shares to be sold by the Selling Stockholders pursuant to such notice of exercise by a fraction, the numerator of which is the number of Firm Common Shares to be purchased by such Underwriter as set forth opposite its name in Schedule A and the denominator of which is 375,000 (subject to such adjustments to eliminate any fractional share purchases as you in your discretion may make). Certificates for the Optional Common Shares will be made available for checking and packaging on the business day preceding the Second Closing Date at a location in New York, New York, as may be designated by you. Delivery of certificates for the Optional Common Shares shall be made by or on behalf of the Selling Stockholders to you, for the respective accounts of the Underwriters with respect to the Optional Common Shares to be sold by the Selling Stockholders against payment by you, for the accounts of the several Underwriters, of the purchase price therefor by a wire transfer of immediately available funds to an account designated by the Agent. At any time before lapse of the option, you may cancel such option by giving written notice of such cancellation to the Agent. If the option is cancelled or expires unexercised in whole or in part, the Company will deregister under the Act the number of Option Shares as to which the option has not been exercised. You have advised the Company and the Selling Stockholders that each Underwriter has authorized you to accept delivery of its Common Shares, to make payment and to receipt therefor. You, individually and not as the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by you by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Subject to the terms and conditions hereof, the Underwriters propose to make a public offering of their respective portions of the Common Shares as soon after the effective date of the Registration Statement as in the judgment of the Representatives is advisable and at the public offering price set forth on the cover page of and on the terms set forth in the final prospectus. SECTION 6. Covenants of the Company. The Company covenants and agrees that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective. If the Registration Statement has become or becomes effective pursuant to Rule 430A of the Rules and Regulations, or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, the Company will file the Prospectus, properly completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules and Regulations within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company will promptly advise you in writing (i) of the receipt of any comments of the Commission, (ii) of any request of the Commission for amendment of or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus or for additional information, (iii) when the Registration Statement shall have become effective, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. The Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus of which you have not been furnished with a copy a reasonable time prior to such filing or to which you reasonably object or which is not in compliance with the Act and the Rules and Regulations. (b) The Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or the Prospectus which in your judgment may be necessary or advisable to enable the several Underwriters to continue the distribution of the Common Shares and will use its best efforts to cause the same to become effective as promptly as possible. The Company will fully and completely comply with the provisions of Rule 430A of the Rules and Regulations with respect to information omitted from the Registration Statement in reliance upon such Rule. (c) If at any time within the nine-month period referred to in Section 10(a)(3) of the Act during which a prospectus relating to the Common Shares is required to be delivered under the Act any event occurs, as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements, to comply with the Act or the Rules and Regulations, the Company will promptly advise you thereof and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment or supplement which will effect such compliance and will use its best efforts to cause the same to become effective as soon as possible; and, in case any Underwriter is required to deliver a prospectus after such nine-month period, the Company upon request, but at the expense of such Underwriter, will promptly prepare such amendment or amendments to the Registration Statement and such Prospectus or Prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. (d) As soon as practicable, but not later than 45 days after the end of the first quarter ending after one year following the "effective date of the Registration Statement" (as defined in Rule 158(c) of the Rules and Regulations), the Company will make generally available to its security holders an earnings statement (which need not be audited) covering a period of 12 consecutive months beginning after the effective date of the Registration Statement which will satisfy the provisions of the last paragraph of Section 11(a) of the Act. (e) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company, at its expense, but only for the nine-month period referred to in Section 10(a)(3) of the Act, will furnish to you and the Selling Stockholders or mail to your order copies of the Registration Statement, the Prospectus, the Preliminary Prospectus and all amendments and supplements to any such documents in each case as soon as available and in such quantities as you and the Selling Stockholders may request, for the purposes contemplated by the Act. (f) The Company shall cooperate with you and your counsel in order to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky laws of such jurisdictions as you designate, will comply with such laws and will continue such qualifications, registrations and exemptions in effect so long as reasonably required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company, with your cooperation, will use its best efforts to obtain the withdrawal thereof. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request of the Representatives, to each of the other Underwriters: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. (h) During the period of 180 days after the first date that any of the Common Shares are released by you for sale to the public, without the prior written consent of either Montgomery Securities or each of the Representatives (which consent may be withheld at the sole discretion of the Montgomery Securities or the Representatives, as the case may be), the Company will not other than pursuant to outstanding stock options and warrants disclosed in the Prospectus issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock or other equity security. (i) The Company will apply the net proceeds of the sale of the Common Shares sold by it substantially in accordance with its statements under the caption "Use of Proceeds" in the Prospectus. (j) The Company will use its best efforts to qualify or register its Common Stock for sale in non-issuer transactions under (or obtain exemptions from the application of) the Blue Sky laws of the State of California (and thereby permit market making transactions and secondary trading in the Company's Common Stock in California), will comply with such Blue Sky laws and will continue such qualifications, registrations and exemptions in effect for a period of five years after the date hereof. (k) The Company will use its best efforts to designate the Common Stock for quotation as a national market system security on the NASD Automated Quotation System. You, on behalf of the Underwriters, may, in your sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. SECTION 7. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective or is terminated, the Company and, unless otherwise paid by the Company, the Selling Stockholders agree to pay in such proportions as they may agree upon among themselves all costs, fees and expenses incurred in connection with the performance of their obligations hereunder and in connection with the transactions contemplated hereby, including without limiting the generality of the foregoing, (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel and the Company's independent accountants, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee of the National Association of Securities Dealers, Inc., and (viii) all other fees, costs and expenses referred to in Item 13 of the Registration Statement. The Underwriters may deem the Company to be the primary obligor with respect to all costs, fees and expenses to be paid by the Company and by the Selling Stockholders. Except as provided in this Section 7, Section 9 and Section 11 hereof, the Underwriters shall pay all of their own expenses, including the fees and disbursements of their counsel (excluding those relating to qualification, registration or exemption under the Blue Sky laws and the Blue Sky memorandum referred to above). This Section 7 shall not affect any agreements relating to the payment of expenses between the Company and the Selling Stockholders. The Selling Stockholders will pay (directly or by reimbursement) all fees and expenses incident to the performance of their obligations under this Agreement which are not otherwise specifically provided for herein, including but not limited to (i) any fees and expenses of counsel for such Selling Stockholders; (ii) any fees and expenses of the Agent; and (iii) all expenses and taxes incident to the sale and delivery of the Common Shares to be sold by such Selling Stockholders to the Underwriters hereunder. The Company and the Selling Stockholders will pay the premium or premiums on the policy of insurance referred to in Section 11(f) below. SECTION 8. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of Company officers and the Selling Stockholders made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 P.M. (or, in the case of a registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not later than 10 P.M.), Washington, D.C. Time, on the date of this Agreement, or at such later time as shall have been consented to by you; if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) of the Rules and Regulations; and prior to such Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company, the Selling Stockholders or you, shall be contemplated by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to your satisfaction. (b) You shall be satisfied that since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there shall not have been any change in the capital stock (other than pursuant to the exercise of outstanding options and warrants disclosed in the Prospectus) of the Company or any of its subsidiaries or any material change in the indebtedness (other than in the ordinary course of business) of the Company or any of its subsidiaries, (ii) except as set forth or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company or any of its subsidiaries, which is not in the ordinary course of business (or which could result in a material reduction in the future earnings of the Company and its subsidiaries), (iii) no loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries shall have been sustained which materially and adversely affects the condition (financial or otherwise), business, results of operations or prospects of the Company and its subsidiaries, (iv) no legal or governmental action, suit or proceeding affecting the Company or any of its subsidiaries which is material to the Company and its subsidiaries or which affects or may affect the transactions contemplated by this Agreement shall have been instituted or threatened, and (v) there shall not have been any material change in the condition (financial or otherwise), business, management, results of operations or prospects of the Company and its subsidiaries which makes it impractical or inadvisable in the judgment of the Representatives to proceed with the public offering or purchase the Common Shares as contemplated hereby. (c) There shall have been furnished to you, as Representatives of the Underwriters, on each Closing Date, in form and substance satisfactory to you, except as otherwise expressly provided below: (i) An opinion of Blank Rome Comisky & McCauley, counsel for the Company and the Selling Stockholders, addressed to the Underwriters and dated the First Closing Date, or the Second Closing Date (in the latter case with respect to the Selling Stockholders only), as the case may be, to the effect that: (1) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions where the ownership or leasing of properties or the conduct of its business requires such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect on the Company and its subsidiaries, and has full corporate power and authority to own its properties and conduct its business as described in the Registration Statement; (2) The authorized, issued and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; all necessary and proper corporate proceedings have been taken in order to authorize validly such authorized Common Stock; all outstanding shares of Common Stock (including the Firm Common Shares and any Optional Common Shares) have been duly and validly issued, are fully paid and nonassessable, have been issued in compliance with federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase any securities and conform to the description thereof contained in the Prospectus; without limiting the foregoing, there are no preemptive or other rights to subscribe for or purchase any of the Common Shares to be sold by the Company hereunder; (3) All of the issued and outstanding shares of the Company's subsidiaries have been duly and validly authorized and issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of all liens, encumbrances, equities, claims, security interests, voting trusts or other defects of title whatsoever; (4) The certificates evidencing the Common Shares to be delivered hereunder are in due and proper form under Pennsylvania law, and when duly countersigned by the Company's transfer agent and registrar, and delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, the Common Shares represented thereby will be duly authorized and validly issued, fully paid and nonassessable, will not have been issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities and will conform in all respects to the description thereof contained in the Prospectus; (5) Except as disclosed in or specifically contemplated by the Prospectus, to the best of such counsel's knowledge, there are no outstanding options, warrants or other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company; (6) (a) The Registration Statement has become effective under the Act, and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b); (b) The Registration Statement, the Prospectus and each amendment or supplement thereto (except for the financial statements and schedules included therein as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the Rules and Regulations; (c) To the best of such counsel's knowledge, there are no franchises, leases, contracts, agreements or documents of a character required to be disclosed in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not disclosed or filed, as required; (d) To the best of such counsel's knowledge, there are no legal or governmental actions, suits or proceedings pending or threatened against the Company which are required to be described in the Prospectus which are not described as required; and (7) The Company has full right, power and authority to enter into this Agreement and to sell and deliver the Common Shares to be sold by it to the several Underwriters; this Agreement has been duly and validly authorized by all necessary corporate action by the Company, has been duly and validly executed and delivered by and on behalf of the Company, and is a valid and binding agreement of the Company enforceable in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except as to those provisions relating to indemnity or contribution for liabilities arising under the Act as to which no opinion need be expressed; and no approval, authorization, order, consent, registration, filing, qualification, license or permit of or with any court, regulatory, administrative or other governmental body is required for the execution and delivery of this Agreement by the Company or the consummation of the transactions contemplated by this Agreement, except such as have been obtained and are in full force and effect under the Act and such as may be required under applicable Blue Sky laws in connection with the purchase and distribution of the Common Shares by the Underwriters and the clearance of such offering with the NASD; (8) The execution and performance of this Agreement and the consummation of the transactions herein contemplated will not conflict with, result in the breach of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of its or their property may be bound or affected which is material to the Company and its subsidiaries, or violate any of the provisions of the articles of incorporation or bylaws, or other organizational documents, of the Company or any of its subsidiaries or, so far as is known to such counsel, violate any statute, judgment, decree, order, rule or regulation of any court or governmental body having jurisdiction over the Company or any of its subsidiaries or any of its or their property; (9) Neither the Company nor any subsidiary is in violation of its articles of incorporation or bylaws, or other organizational documents, or to the best of such counsel's knowledge, in breach of or default with respect to any provision of any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company or any such subsidiary is a party or by which it or any of its properties may be bound or affected, except where such default would not materially adversely affect the Company and its subsidiaries; and, to the best of such counsel's knowledge, the Company and its subsidiaries are in compliance with all laws, rules, regulations, judgments, decrees, orders and statutes of any court or jurisdiction to which they are subject, except where noncompliance would not materially adversely affect the Company and its subsidiaries; (10) To the best of such counsel's knowledge, no holders of securities of the Company have rights which have not been waived to the registration of shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company or the offering contemplated hereby; (11) To the best of such counsel's knowledge, this Agreement and the Stockholders Agreement have been duly authorized, executed and delivered by or on behalf of each of the Selling Stockholders; the Agent has been duly and validly authorized to act as the custodian of the Common Shares to be sold by each such Selling Stockholder; and the performance of this Agreement and the Stockholders Agreement and the consummation of the transactions herein contemplated by the Selling Stockholders will not result in a breach of, or constitute a default under, any indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which any of the Selling Stockholders is a party or by which any of the Selling Stockholders or any of their properties may be bound, or violate any statute, judgment, decree, order, rule or regulation known to such counsel of any court or governmental body having jurisdiction over any of the Selling Stockholders or any of their properties; and to the best of such counsel's knowledge, no approval, authorization, order or consent of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Stockholders Agreement or the consummation by the Selling Stockholders of the transactions contemplated by this Agreement, except such as have been obtained and are in full force and effect under the Act and such as may be required under the rules of the NASD and applicable Blue Sky laws; (12) To the best of such counsel's knowledge, the Selling Stockholders have full right, power and authority to enter into this Agreement and the Stockholders Agreement and to sell, transfer and deliver the Common Shares to be sold on such Closing Date by such Selling Stockholders hereunder and good and marketable title to such Common Shares so sold, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts, or other defects of title whatsoever, has been transferred to the Underwriters (whom counsel may assume to be bona fide purchasers) who have purchased such Common Shares hereunder; and (13) To the best of such counsel's knowledge, this Agreement and the Stockholders Agreement are valid and binding agreements of each of the Selling Stockholders in accordance with their terms except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except with respect to those provisions relating to indemnities or contributions for liabilities under the Act, as to which no opinion need be expressed. (14) No transfer taxes are required to be paid in connection with the sale and delivery of the Common Shares to the Underwriters hereunder. (15) The Recapitalization (as defined in the Prospectus) has been consummated pursuant to the terms described therein. (16) The agreements necessary to effect the acquisition of MAB have been duly authorized, executed and delivered by each of the parties thereto and constitute the valid, legal and binding agreements of each such party, and the acquisition of all of the capital stock of MAB by the Company and the related transactions contemplated thereby have been consummated pursuant to the terms described in the Prospectus. In rendering such opinion, such counsel may rely, as to matters of local law, on opinions of local counsel, and as to matters of fact, on certificates of the Selling Stockholders and of officers of the Company and of governmental officials, in which case their opinion is to state that they are so doing and that the Underwriters are justified in relying on such opinions or certificates and copies of said opinions or certificates are to be attached to the opinion. Such counsel shall also include a statement to the effect that nothing has come to such counsel's attention that would lead such counsel to believe that either at the effective date of the Registration Statement or at the applicable Closing Date the Registration Statement or the Prospectus, or any such amendment or supplement, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) Such opinion or opinions of Piper & Marbury L.L.P., counsel for the Underwriters dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the Common Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company and the Selling Stockholders shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass upon such matters. In connection with such opinions, such counsel may rely on representations or certificates of officers of the Company and governmental officials. (iii) A certificate of the Company executed by the President and the chief financial or accounting officer of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) The representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied on or prior to such Closing Date; (2) The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Act; (3) Each of the respective signers of the certificate has carefully examined the Registration Statement and the Prospectus; in his opinion and to the best of his knowledge, the Registration Statement and the Prospectus and any amendments or supplements thereto contain all statements required to be stated therein regarding the Company and its subsidiaries; and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (4) Since the initial date on which the Registration Statement was filed, no agreement, written or oral, transaction or event has occurred which should have been set forth in an amendment to the Registration Statement or in a supplement to or amendment of any prospectus which has not been disclosed in such a supplement or amendment; (5) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), business, properties, results of operations, management or prospects of the Company and its subsidiaries; and no legal or governmental action, suit or proceeding is pending or threatened against the Company or any of its subsidiaries which is material to the Company and its subsidiaries, whether or not arising from transactions in the ordinary course of business, or which may adversely affect the transactions contemplated by this Agreement; since such dates and except as so disclosed, neither the Company nor any of its subsidiaries has entered into any verbal or written agreement or other transaction which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company or incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock, made any material change in its short-term debt or funded debt or repurchased or otherwise acquired any of the Company's capital stock; and the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to stockholders of record on a date prior to the First Closing Date or Second Closing Date; and (6) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and except as disclosed in or contemplated by the Prospectus, the Company and its subsidiaries have not sustained a material loss or damage by strike, fire, flood, windstorm, accident or other calamity (whether or not insured). (iv) On the Second Closing Date, a certificate, dated such Closing Date and addressed to you, signed by or on behalf of each of the Selling Stockholders to the effect that the representations and warranties of such Selling Stockholder in this Agreement are true and correct, as if made at and as of the Second Closing Date, and such Selling Stockholder has complied with all the agreements and satisfied all the conditions on his part to be performed or satisfied prior to the Second Closing Date. (v) On the date before this Agreement is executed and also on the First Closing Date and the Second Closing Date a letter addressed to you, as Representatives of the Underwriters, from Coopers & Lybrand, independent accountants, the first one to be dated the day before the date of this Agreement, the second one to be dated the First Closing Date and the third one (in the event of a Second Closing) to be dated the Second Closing Date, in form and substance satisfactory to you. (vi) On or before the First Closing Date, letters from each of the Selling Stockholders, each holder of one percent or more of the Company's Common Stock and each director and officer of the Company, in form and substance satisfactory to you, confirming that for a period of 180 days after the first date that any of the Common Shares are released by you for sale to the public, such person will not directly or indirectly sell or offer to sell or otherwise dispose of any shares of Common Stock or any right to acquire such shares without the prior written consent of either Montgomery Securities or each of the Representatives, which consent may be withheld at the sole discretion of Montgomery Securities or each of the Representatives, as the case may be. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to you and to Piper & Marbury L.L.P., counsel for the Underwriters. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. Any certificate signed by any officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the statements made therein. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification by you as Representatives to the Company and the Selling Stockholders without liability on the part of any Underwriter, the Company or the Selling Stockholders except for the expenses to be paid or reimbursed by the Company and by the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof. SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding any other provisions hereof, if this Agreement shall be terminated by you pursuant to Section 8, or if the sale to the Underwriters of the Common Shares at the First Closing is not consummated because of any refusal, inability or failure on the part of the Company or the Selling Stockholders to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse you and the other Underwriters upon demand for all out-of-pocket expenses that shall have been reasonably incurred by you and them in connection with the proposed purchase and the sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, telegraph charges and telephone charges relating directly to the offering contemplated by the Prospectus. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 7 and Section 11 shall at all times be effective and shall apply. SECTION 10. Effectiveness of Registration Statement. You, the Company and the Selling Stockholders will use your, its and their best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 11. Indemnification. (a) The Company and each of the Selling Stockholders, jointly and severally, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages, liabilities or expenses, joint or several, to which such Underwriter or such controlling person may become subject, under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them not misleading, or arise out of or are based in whole or in part on any inaccuracy in the representations and warranties of the Company or the Selling Stockholders contained herein or any failure of the Company or the Selling Stockholders to perform their respective obligations hereunder or under law; and will reimburse each Underwriter and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that neither the Company nor the Selling Stockholders will be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with the information furnished to the Company pursuant to Section 4 hereof. The Company and the Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. In no event, however, shall the liability of any Selling Stockholder for indemnification under this Section 11(a) exceed the sum of (i) the proceeds received by such Selling Stockholder from the Underwriters in the offering and (ii) the portion of the S Corporation Distributions (as defined in the Prospectus) received by the Selling Stockholder from the Company. In addition to its other obligations under this Section 11(a), the Company and the Selling Stockholders agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, or any inaccuracy in the representations and warranties of the Company or the Selling Stockholders herein or failure to perform its obligations hereunder, all as described in this Section 11(a), it will reimburse each Underwriter on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's or the Selling Stockholders' obligation to reimburse each Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Underwriter shall promptly return it to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement, shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which the Company or the Selling Stockholders may otherwise have. (b) Each Underwriter will severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Stockholders and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act, against any losses, claims, damages, liabilities or expenses to which the Company, or any such director, officer, Selling Stockholder or controlling person may become subject, under the Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished to the Company pursuant to Section 4 hereof; and will reimburse the Company, or any such director, officer, Selling Stockholder or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer, Selling Stockholder or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. In addition to its other obligations under this Section 11(b), each Underwriter severally agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 11(b) which relates to information furnished to the Company pursuant to Section 4 hereof, it will reimburse the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) shall promptly return it to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within 30 days of a request for reimbursement, shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Representatives in the case of paragraph (a), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) If the indemnification provided for in this Section 11 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under paragraphs (a), (b) or (c) in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Selling Stockholders and the Underwriters from the offering of the Common Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Selling Stockholders and the Underwriters in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Company, the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion, in the case of the Company and the Selling Stockholders as the total price paid to the Company and to the Selling Stockholders (and, in the case of the Selling Stockholders, including the amount of the S Corporation Distributions received by them), respectively, for the Common Shares sold by them to the Underwriters (net of underwriting commissions but before deducting expenses) bears to the total price to the public set forth on the cover of the Prospectus, and in the case of the Underwriters as the underwriting commissions received by them bears to the total price to the public set forth on the cover of the Prospectus. The relative fault of the Company, the Selling Stockholders and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in subparagraph (c) of this Section 11, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in subparagraph (c) of this Section 11 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this subparagraph (d); provided, however, that no additional notice shall be required with respect to any action for which notice has been given under subparagraph (c) for purposes of indemnification. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 11 were determined solely by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 11, no Underwriter shall be required to contribute any amount in excess of the amount of the total underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 11 are several in proportion to their respective underwriting commitments and not joint. (e) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 11(a) and 11(b) hereof, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in Sections 11(a) and 11(b) hereof and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of such Sections 11(a) and 11(b) hereof. (f) [Language on insurance to follow.] SECTION 12. Default of Underwriters. It shall be a condition to this Agreement and the obligation of the Company and the Selling Stockholders to sell and deliver the Common Shares hereunder, and of each Underwriter to purchase the Common Shares in the manner as described herein, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all the Common Shares agreed to be purchased by such Underwriter hereunder upon tender to the Representatives of all such shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Common Shares hereunder on either the First or Second Closing Date and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase on such Closing Date does not exceed 10% of the total number of Common Shares which the Underwriters are obligated to purchase on such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Common Shares which such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of Common Shares with respect to which such default occurs is more than the above percentage and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares by other persons are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company or the Selling Stockholders except for the expenses to be paid by the Company and the Selling Stockholders pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof. In the event that Common Shares to which a default relates are to be purchased by the non-defaulting Underwriters or by another party or parties, the Representatives or the Company shall have the right to postpone the First or Second Closing Date, as the case may be, for not more than five business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 13. Effective Date. This Agreement shall become effective immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions, (i) if at the time of execution of this Agreement the Registration Statement has not become effective, at 2:00 P.M., California time, on the first full business day following the effectiveness of the Registration Statement, or (ii) if at the time of execution of this Agreement the Registration Statement has been declared effective, at 2:00 P.M., California time, on the first full business day following the date of execution of this Agreement; but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine on and by notice to the Company or by release of any of the Common Shares for sale to the public. For the purposes of this Section 13, the Common Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Common Shares or upon the release by you of telegrams (i) advising Underwriters that the Common Shares are released for public offering, or (ii) offering the Common Shares for sale to securities dealers, whichever may occur first. SECTION 14. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you and the Selling Stockholders or by you by notice to the Company and the Selling Stockholders at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company or the Selling Stockholders to any Underwriter (except for the expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof) or of any Underwriter to the Company or the Selling Stockholders (except to the extent provided in Section 11 hereof). (b) This Agreement may also be terminated by you prior to the First Closing Date by notice to the Company (i) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such Exchange or in the over the counter market by the NASD, or a general banking moratorium shall have been established by federal, New York or California authorities, (ii) if an outbreak of major hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in the judgment of the Representatives, to affect adversely the marketability of the Common Shares, (iii) if any adverse event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or Prospectus or which is not reflected in the Registration Statement or Prospectus but should be reflected therein in order to make the statements or information contained therein not misleading in any material respect, or (iv) if there shall be any action, suit or proceeding pending or threatened, or there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or any of its subsidiaries or the transactions contemplated by this Agreement, which, in the reasonable judgment of the Representatives, may materially and adversely affect the Company's business or earnings and makes it impracticable or inadvisable to offer or sell the Common Shares. Any termination pursuant to this subsection (b) shall without liability on the part of any Underwriter to the Company or the Selling Stockholders or on the part of the Company or the Selling Stockholders to any Underwriter (except for expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof. (c) This Agreement shall also terminate at 5:00 P.M., California time, on the tenth full business day after the Registration Statement shall have become effective if the initial public offering price of the Common Shares shall not then as yet have been determined as provided in Section 5 hereof. Any termination pursuant to this subsection (c) shall without liability on the part of any Underwriter to the Company or the Selling Stockholders or on the part of the Company or the Selling Stockholders to any Underwriter (except for expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof). SECTION 15. Failure of the Selling Stockholders to Sell and Deliver. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Stockholders at the Second Closing Date under the terms of this Agreement, then the Underwriters may at their option, by written notice from you to the Company and the Selling Stockholders, either (i) terminate this Agreement without any liability on the part of any Underwriter or, except as provided in Sections 7, 9 and 11 hereof, the Company or the Selling Stockholders, or (ii) purchase the shares which the Company and other Selling Stockholders have agreed to sell and deliver in accordance with the terms hereof. In the event of a failure by one or more of the Selling Stockholders to sell and deliver as referred to in this Section, either you or the Company shall have the right to postpone the Second Closing Date for a period not exceeding seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. SECTION 16. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Stockholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, or the Selling Stockholders, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. SECTION 17. Notices. All communications hereunder shall be in writing and, if sent to the Representatives shall be mailed, delivered or telegraphed and confirmed to you at 600 Montgomery Street, San Francisco, California 94111, Attention: Mr. Frank M. Dunlevy, with a copy to Piper & Marbury L.L.P., 36 S. Charles Street, Baltimore, Maryland 21201, Attention, Henry D. Kahn, Esquire; and if sent to the Company or the Selling Stockholders shall be mailed, delivered or telegraphed and confirmed to the Company at 1740 Walton Road, Blue Bell, Pennsylvania 19422-0987, Attention: Mr. Michael J. Barrist with a copy to Blank Rome Comisky & McCauley, 1200 Four Penn Center Plaza, Philadelphia, Pennsylvania 19103, Attention: Francis E. Dehel, Esquire. The Company, the Selling Stockholders or you may change the address for receipt of communications hereunder by giving notice to the others. SECTION 18. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 12 hereof, and to the benefit of the officers and directors and controlling persons referred to in Section 11, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. No such assignment shall relieve any party of its obligations hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 19. Representation of Underwriters. You will act as Representatives for the several Underwriters in connection with all dealings hereunder, and any action under or in respect of this Agreement taken by you jointly or by Montgomery Securities, as Representatives, will be binding upon all the Underwriters. SECTION 20. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 21. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of California. SECTION 22. General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in several counterparts, each one of which shall be an original, and all of which shall constitute one and the same document. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company, the Selling Stockholders and you. Any person executing and delivering this Agreement as Attorney-in-fact for the Selling Stockholders represents by so doing that he has been duly appointed as Attorney-in-fact by such Selling Stockholders pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-fact to take such action. Any action taken under this Agreement by any of the Attorneys-in-fact will be binding on all the Selling Stockholders. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed copies hereof, whereupon it will become a binding agreement among the Company, the Selling Stockholders and the several Underwriters including you, all in accordance with its terms. Very truly yours, NCO GROUP, INC. By: --------------------------------------- Michael J. Barrist, President SELLING STOCKHOLDERS By: --------------------------------- (Attorney-in-fact) By: --------------------------------- (Attorney-in-fact) The foregoing Underwriting Agreement is hereby confirmed and accepted by us in San Francisco, California as of the date first above written. MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. Acting as Representatives of the several Underwriters named in the attached Schedule A. By MONTGOMERY SECURITIES By: --------------------------------------- Partner SCHEDULE A Number of Firm Common Shares Name of Underwriter to be Purchased - --------------------- ------------------ Montgomery Securities ................ Janney Montgomery Scott Inc....... --------- TOTAL ...................... ========= [SCHEDULE B Number of Firm Common Shares to be Sold by Selling Name of Selling Stockholder Stockholders - ---------------------------------- ------------------ --------- TOTAL ...................... =========] SCHEDULE C __________, 19__ PRICE DETERMINATION AGREEMENT Referring to Section 5 of the Underwriting Agreement dated __________, 19__, among the Company, the Selling Stockholders and the Underwriters as therein defined with respect to the purchase and sale of the Common Shares, we hereby confirm our agreement that the initial public offering price of the Common Shares shall be $_____ per share; that the underwriting discount shall be $_____ per share; and that the purchase price to be paid by the several Underwriters for the Common Shares to be purchased from the Company and the Selling Stockholders shall be $_____ per share. This Agreement may be executed in various counterparts which together shall constitute one and the same Agreement. MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. By Montgomery Securities Acting on behalf of the several Underwriters named in Schedule A to the Underwriting Agreement By --------------------------------------- Partner NCO GROUP, INC. By --------------------------------------- Michael J. Barrist, President SELLING STOCKHOLDERS By --------------------------------------- Acting on behalf of the Selling Stockholders EX-3 3 EXHIBIT 3.1 EXHIBIT 3.1 NCO GROUP, INC. Amended and Restated Articles of Incorporation The Articles of Incorporation of NCO Group, Inc. are hereby amended and restated in their entirety to read as follows: Article 1. Name. The name of the corporation is NCO Group, Inc. (the "Corporation"). Article 2. Registered Office. The location and address of the registered office of the Corporation in this Commonwealth is: 1740 Walton Road Blue Bell, PA 19422 Article 3. Purpose. The Corporation is incorporated under the Pennsylvania Business Corporation Law of 1988, as it may be amended from time to time, for the following purposes: To have unlimited power to engage in or do any lawful act concerning any or all lawful businesses for which corporations may be incorporated under the Pennsylvania Business Corporation Law of 1988, as amended from time to time, including without limitation, to provide accounts receivable management and related services. Article 4. Term. The term for which the Corporation is to exist is perpetual. Article 5. Authorized Capital Stock. The Corporation shall have the authority to issue an aggregate of 30,000,000 shares of capital stock which shall be divided into 25,000,000 shares of Common Stock, no par value, as more fully described in Section 5(a) below, and 5,000,000 shares of Preferred Stock, no par value, as more fully described in Section 5(b) below. (a) Common Stock. Each holder of record of Common Stock shall have the right to one vote for each share of Common Stock registered in their name on the books of the Corporation. (b) Preferred Stock. The shares of Preferred Stock may be divided and issued from time to time in one or more series as may be determined by the Board of Directors of the Corporation, each such series to be distinctly designated and to consist of the number of shares determined by the Board of Directors. The Board of Directors of the Corporation is hereby expressly vested with authority to adopt resolutions to issue the shares, to fix the number of shares, to change the number of shares constituting any class or series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions, if any, of Preferred Stock, and each class or series thereof, in each case without approval of the shareholders. The authority of the Board of Directors with respect to each class or series of Preferred Stock shall include, without limiting the generality of the foregoing, the determination of the following: (1) The number of shares constituting that class or series and the distinctive designation of that class or series; (2) The dividend rate on the shares of that class or series, whether dividends shall be cumulative, and, if so, from which date or dates; (3) Whether that class or series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights; (4) Whether that class or series shall have conversion privileges (including rights to convert such class or series into the capital stock of the Corporation or any other entity) and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (5) Whether or not shares of that class or series shall be redeemable and whether or not the Corporation or the holder (or both) may exercise the redemption right, including the terms of redemption (including any sinking fund provisions), the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions; (6) The rights of the shares of that class or series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (7) Any other relative rights, preferences and limitations of that class or series as may be permitted or required by law. The number of shares, voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions, if any, of any class or series of Preferred Stock which may be designated by the Board -2- of Directors may differ from those of any and all other class or series at any time outstanding. (c) Increase in Authorized Preferred Stock. Except as otherwise provided by law or in a resolution or resolutions establishing any particular series of Preferred Stock, the aggregate number of authorized shares of Preferred Stock may be increased by an amendment to these Amended and Restated Articles of Incorporation approved solely by the holders of Common Stock and of any series of Preferred Stock which is entitled pursuant to its voting rights designated by the Board of Directors to vote thereon, if at all, voting together as a class. Article 6. Cumulative Voting. The shareholders of the Corporation shall not be entitled to cumulate their votes in the election of directors. Article 7. Special Meetings of Shareholders. The shareholders of the Corporation shall not be entitled to call a special meeting of the shareholders of the Corporation. Article 8. Actions By Consent of Shareholders. No action may be authorized by the shareholders of the Corporation without a meeting by less than unanimous written consent. Article 9. Non-Applicability of Certain Provisions of the Pennsylvania Business Corporation Law. The provisions contained in Subchapters E (Control Transactions), G (Control- Share Acquisitions), H (Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control), I (Severance Compensation for Employees Terminated Following Certain Control- Share Acquisitions) and J (Business Combination Transactions - Labor Contracts) of Chapter 25 of the Pennsylvania Business Corporation Law, as it may be amended, shall not be applicable to the Corporation. The provisions of Section 2538 of the Pennsylvania Business Corporation Law, as it may be amended, shall not be applicable to the Corporation, unless at least a majority of the incumbent directors (as defined herein) on the Board of Directors shall determine that Section 2538, subject to such exceptions, limitations and modifications as such incumbent directors may provide, shall be applicable. The term "incumbent director", as used herein, shall mean any director of the Corporation on the date hereof and any other director whose election or appointment by the Board of Directors of the Corporation, or whose nomination for election by the shareholders of the Corporation, was approved by a vote of at least a majority of the directors then in office who either were directors on the date hereof or whose election or appointment or nomination for election was previously so approved. -3- Article 10. Power of Board to Oppose Certain Transactions. (a) The Board of Directors, if it deems it advisable, may oppose a tender offer or other offer for the Corporation's securities, whether the offer is in cash or in securities of a corporation or otherwise. In considering whether to oppose an offer, the Board of Directors may, but it is not legally obligated to, consider any pertinent issues. By way of illustration, but not of limitation, the Board of Directors may, but shall not be legally obligated to, consider any and all of the following: (1) Whether the offer price is acceptable based on the historical and present operating results or financial conditions of the Corporation; (2) Whether a more favorable price could be obtained for the Corporation's securities in the future; (3) The effects of any proposed transaction upon any or all groups affected by such action, including among others, shareholders, employees, suppliers, customers and creditors of the Corporation and its subsidiaries and on the communities served by the Corporation and its subsidiaries; (4) The reputation and business practices of the offeror and its management and affiliates as they would affect the employees, suppliers and customers of the Corporation and its subsidiaries and the future value of the Corporation's stock; (5) The value of the securities, if any, which the offeror is offering in exchange for the Corporation's securities, based on an analysis of the worth of the Corporation as compared to the corporation or other entity whose securities are being offered; and (6) Any antitrust or other legal and regulatory issues that are raised by the offer. If the Board of Directors determines that an offer should be rejected, it may take any lawful action to accomplish its purpose including, but not limited to, any and all of the following: advising shareholders not to accept the offer; commencing litigation against the offeror; filing complaints with all governmental and regulatory authorities; acquiring the Corporation's securities and/or the offeror's securities; selling or acquiring any assets; selling or otherwise issuing authorized but unissued securities or treasury stock or granting options with respect thereto; selling or otherwise issuing any debt securities -4- (including debt securities convertible into equity securities) or options therefor; acquiring a company to create an antitrust or other regulatory problem for the offeror; and obtaining a more favorable offer from another individual or entity. (b) If the Board of Directors determines to sell the Corporation or any subsidiary to a third party, or to merge or consolidate the Corporation or any subsidiary with a third party, the Board of Directors shall not be legally obligated to create an auction and may negotiate with only one acquirer. Article 11. Removal of Directors. The entire Board of Directors, or a class of the Board, or any individual director may be removed from office only for cause (as defined herein) and only by the affirmative vote of shareholders entitled to cast at least sixty-five percent (65%) of the votes entitled to be cast by all shareholders at any annual or regular election of directors or of such class of directors. The foregoing shall not be deemed to limit the right of the Board of Directors, without shareholder approval, to declare vacant the office of any director for any proper cause. The term "cause," as used herein, shall refer only to one of the following events: (1) conviction of the director of a felony; (2) declaration by order of court that the director is of unsound mind; or (3) gross abuse of trust which is proved by clear and convincing evidence to have been committed in bad faith. Article 12. Amendments to Articles of Incorporation. The shareholders of the Corporation shall not be entitled to propose an amendment to the Articles of Incorporation of the Corporation. Any amendment to, or repeal of, any provision of the Articles of Incorporation of the Corporation which has not previously received the approval of at least a majority of the incumbent directors (as defined in Article 9) on the Board of Directors shall require for adoption the affirmative vote of the shareholders entitled to cast at least sixty-five percent (65%) of the votes entitled to be cast by all shareholders at any duly convened annual or special meeting of the shareholders, in addition to any other approval which is required by law, the Articles of Incorporation of the Corporation, the Bylaws of the Corporation, or otherwise. Article 13. Amendments to Bylaws. The Bylaws of the Corporation may be amended or repealed without shareholder approval by a majority of the incumbent directors (as defined in Article 9), subject to any other approval which is required by law, the Articles of Incorporation, the Bylaws of the Corporation, or otherwise. Any amendment to, or repeal of, any provision of the Bylaws of the Corporation which has not previously received the approval of at least a majority of the incumbent directors on the Board of Directors shall require for adoption the affirmative vote of the shareholders entitled to cast at least sixty-five percent -5- (65%) of the votes entitled to be cast by all shareholders at any duly convened annual or special meeting of the shareholders, in addition to any other approval which is required by law, the Articles of Incorporation of the Corporation, the Bylaws of the Corporation, or otherwise. Article 14. Severability. In the event that all, some or any part of any provision contained in these Amended and Restated Articles of Incorporation shall be found by any court of competent jurisdiction to be illegal, invalid or unenforceable (as against public policy or otherwise), such provision shall be enforced to the fullest extent permitted by law and shall be construed as if it had been narrowed only to the extent necessary so as not to be invalid, illegal or unenforceable; the validity, legality and enforceability of the remaining provisions of these Amended and Restated Articles of Incorporation shall continue in full force and effect and shall not be affected or impaired by such illegality, invalidity or unenforceability of any other provision (or any part or parts thereof) of the Amended and Restated Articles of Incorporation. Article 15. Headings. Article headings and the ordering of paragraphs area for convenience of reference only and shall not be construed to alter, amend or otherwise affect the meaning, intent or effect of the provisions of these Amended and Restated Articles of Incorporation. -6- EX-3 4 EXHIBIT 3.2 EXHIBIT 3.2 NCO GROUP, INC. Amended and Restated Bylaws These Bylaws are supplemental to the Pennsylvania Business Corporation Law as the same shall from time to time be in effect. ARTICLE I. SHAREHOLDERS. Section 101. Place of Shareholders' Meetings. All meetings of the shareholders shall be held at such place or places, inside or outside the Commonwealth of Pennsylvania, as determined by the Board of Directors from time to time. Section 102. Annual Shareholders' Meeting. The annual meeting of the shareholders for the election of directors and the transaction of such other business as may properly come before such meeting shall be held at such time and place as determined by the Board of Directors. Any business which is a proper subject for shareholder action may be transacted at the annual meeting, irrespective of whether the notice of said meeting contains any reference thereto, except as otherwise provided by applicable law. Section 103. Special Meetings of Shareholders. Special meetings of the shareholders may be called at any time by the Board of Directors or the Chairman of the Board or the Chief Executive Officer. Section 104. Conduct of Shareholders' Meetings. The Chairman of the Board shall preside at all shareholders' meetings. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside or, in his or her absence, any officer designated by the Board of Directors shall preside. The officer presiding over the shareholders' meeting may establish such rules and regulations for the conduct of the meeting as he or she may deem to be reasonably necessary or desirable for the orderly and expeditious conduct of the meeting. Unless the officer presiding over the shareholders' meeting otherwise requires, shareholders need not vote by ballot on any questions. ARTICLE II. DIRECTORS. Section 201. Management by Board of Directors. The business and affairs of the Corporation shall be managed by its Board of Directors. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, regulation, the Amended and Restated Articles of Incorporation or these Amended and Restated Bylaws directed or required to be exercised or done by the shareholders. Section 202. Nomination for Directors and Submission of Proposals. (a) Nominations for directors to be elected may be made at a meeting of shareholders only by (i) the Board of Directors (or any committee thereof), or (ii) a shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the procedure set forth in Section 202(b) of these Bylaws. Business may be conducted at a meeting of the shareholders of the Corporation only if such business (i) was specified in the notice of meeting (or any supplement thereto) given by the Board of Directors, (ii) is otherwise properly brought before the meeting by the Board of Directors, or (iii) is otherwise properly brought before the meeting by a shareholder of the Corporation in accordance with the procedure set forth in Section 202(b) of these Bylaws. Notwithstanding the foregoing, at any time prior to the election of directors at a meeting of shareholders, the Board of Directors may designate a substitute nominee to replace any bona fide nominee who was nominated as set forth above and who, for any reason, becomes unavailable for election as a director. (b) Beginning with the annual meeting of the shareholders to be held in 1997, nominations by shareholders for directors to be elected, or proposals by shareholders to be considered, at a meeting of shareholders and which have not been previously approved by the Board of Directors must be submitted to the Secretary of the Corporation in writing, either by personal delivery, nationally-recognized express mail or United States mail, postage prepaid, not later than (i) with respect to an election to be held, or a proposal to be considered, at an annual meeting of shareholders, the latest date upon which shareholder proposals must be submitted to the Corporation for inclusion in the Corporation's proxy statement relating to such meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, or other applicable rules or regulations under the federal securities laws or, if no such rules apply, at least ninety (90) days prior to the date one year from the date of the immediately preceding annual meeting of shareholders, and (ii) with respect to an election to be held, or a proposal to be considered, at a special meeting of shareholders, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Each such nomination or proposal shall set forth: (i) the name and address of the shareholder making the nomination or proposal and the person or persons nominated, or the subject matter of the proposal submitted; (ii) a representation that the shareholder is a holder of record of capital stock of the Corporation -2- entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to vote for the person or persons nominated, or the proposal submitted; (iii) a description of all arrangements and understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination was made, or the proposal was submitted, by the shareholder; (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated by the Board of Directors; and (v) the consent of each nominee to serve as a director of the Corporation if so elected. All late nominations and proposals shall be rejected. Section 203. Number and Classification of Directors. The Board of Directors shall consist of not less than three (3) and not more than seven (7) directors. Effective upon completion of the Corporation's initial public offering of securities under the federal Securities Act of 1933, as amended, the directors shall be divided into three (3) classes, as nearly equal in number as possible, known as Class I, consisting of not more than two (2) directors; Class II, consisting of not more than two (2) directors; and Class III, consisting of not more than three (3) directors. The initial directors of Class I shall serve until the annual meeting of shareholders to be held in 1997. At the 1997 annual meeting of the shareholders, the directors of Class I shall be elected for a term of three (3) years and, after expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. The initial directors of Class II shall serve until the annual meeting of the shareholders to be held in 1998. At the 1998 annual meeting of the shareholders, the directors of Class II shall be elected for a term of three (3) years and, after the expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. The initial directors of Class III shall serve until the annual meeting of shareholders to be held in 1999. At the 1999 annual meeting of the shareholders, the directors of Class III shall be elected for a term of three (3) years and, after the expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. The number of directors to be elected, subject to the foregoing limits, shall be determined from time to time by the Board of Directors. Each director shall serve until his or her successor shall have been elected and shall qualify, even though his or her term of office as herein provided has otherwise expired, except in the event of his or her earlier resignation, removal or disqualification. Section 204. Vacancies in the Board of Directors. Subject to the rights of the holders of any series of the Corporation's -3- Preferred Stock then outstanding, vacancies in the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by the affirmative vote of at least a majority of the remaining members of the Board, even though less than a quorum, and each person so elected shall be a director until his successor is elected by the shareholders. Any director elected to fill a vacancy in the Board of Directors shall become a member of the same class of directors in which the vacancy existed; but if the vacancy is due to an increase in the number of directors, a majority of the members of the Board of Directors shall designate such directorship as belonging to Class I, Class II or Class III so as to maintain the three (3) classes of directors as nearly equal in number as possible. Each director so elected shall hold office for the unexpired term of the class to which he has been elected, and thereafter until his or her successor shall have been duly elected and qualified, except in the event of his or her earlier resignation, removal or disqualification. Section 205. Resignations of Directors. Any director may resign at any time. Such resignation shall be in writing, but the acceptance thereof shall not be necessary to make it effective. Section 206. Compensation of Directors. No director shall be entitled to any salary as such, but the Board of Directors may fix, from time to time, a reasonable annual fee for acting as a director and a reasonable fee to be paid each director for his or her services in attending meetings of the Board or committees thereof. Section 207. Regular Meetings. Regular meetings of the Board of Directors shall be held on such day, at such hour, and at such place, consistent with applicable law, as the Board shall from time to time designate or as may be designated in any notice from the Secretary calling the meeting. The Board of Directors shall meet for reorganization at the first regular meeting following the annual meeting of shareholders at which the directors are elected. Notice need not be given of regular meetings of the Board of Directors which are held at the time and place designated by the Board of Directors. If a regular meeting is not to be held at the time and place designated by the Board of Directors, notice of such meeting, which need not specify the business to be transacted thereat and which may be either oral or written, shall be given by the Secretary to each member of the Board at least twenty-four hours before the time of the meeting. Section 208. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the Chief Executive Officer and shall be called whenever a majority of the members of the Board so request in writing. A special meeting of the Board of Directors shall be deemed to be any meeting other -4- than the regular meeting of the Board of Directors. Notice of the time and place of every special meeting, which need not specify the business to be transacted thereat and which may be either oral or written, shall be given by the Secretary to each member of the Board at least twenty-four hours before the time of such meeting. Section 209. Reports and Records. The reports of officers and committees and the records of the proceedings of all committees shall be filed with the Secretary of the Corporation and presented to the Board of Directors, if practicable, at its next regular meeting. The Board of Directors shall keep complete records of its proceedings in a minute book kept for that purpose. When a director shall request it, the vote of each director upon a particular question shall be recorded in the minutes. Section 210. Committees. The following committees of the Board of Directors may be established by the Board of Directors in addition to any other committee the Board of Directors may in its discretion establish: (a) Executive Committee; (b) Audit Committee; and (c) Compensation Committee. Section 211. Executive Committee. The Executive Committee shall consist of at least two (2) directors. Meetings of the Committee may be called at any time by the Chairman of the Executive Committee and shall be called whenever two or more members of the Committee so request in writing. The Executive Committee shall have and exercise the authority of the Board of Directors in the management of the business of the Corporation between the dates of regular meetings of the Board. Section 212. Audit Committee. The Audit Committee shall consist of at least two (2) directors, a majority of which shall be independent. Meetings of the Audit Committee may be called at any time by the Chairman of the Audit Committee and shall be called whenever two or more members of the Committee so request in writing. The Audit Committee shall have the following authority, powers and responsibilities: (a) To recommend each year to the Board the independent accountants to audit the annual financial statements of the Corporation and its consolidated subsidiaries and to review the fees charged for such audits or for special engagements given to such accountants; (b) To meet with the independent accountants, Chief Executive Officer, Chief Financial Officer and any other Corporation executives as the Audit Committee deems appropriate at such times as the Audit Committee shall determine to review: (i) the scope of the audit plan; (ii) the Corporation's financial state- -5- ments; (iii) the results of external and internal audits; (iv) the effectiveness of the Corporation's system of internal controls; (v) any limitations imposed by Corporation personnel on the independent public accountants; and (vi) such other matters as the Audit Committee shall deem appropriate; (c) To report to the entire Board at such time as the Audit Committee shall determine; and (d) To take such other action as the Audit Committee shall deem necessary or appropriate to assure that the interests of the Company are adequately protected. Section 213. Compensation Committee. The Compensation Committee shall consist of at least two (2) directors. Meetings of the Committee may be called at any time by the Chairman of the Committee and shall be called whenever two or more members of the Committee so request in writing. The Committee shall review compensation of executive officers and make recommendations to the Board of Directors regarding executive compensation and shall have such other duties as the Board of Directors prescribes. Section 214. Appointment of Committee Members. The Board of Directors shall appoint or shall establish a method of appointing the members of the Executive, Audit and Compensation Committees and of any other committee established by the Board of Directors, and the Chairman of each such committee, to serve until the next annual meeting of shareholders. Section 215. Organization and Proceedings. Each committee of the Board of Directors shall effect its own organization by the appointment of a Secretary and such other officers, except the Chairman, as it may deem necessary. The Secretary of the Executive Committee shall be the Secretary of the Corporation, but the Secretary of the Audit and Compensation Committees and of any other committee need not be the Secretary of the Corporation. A record of the proceedings of all committees shall be kept by the Secretary of such committee and filed and presented as provided in Section 209 of these Bylaws. Section 216. Committees. In the absence or disqualification of any member of any committee established by the Board of Directors, the members thereof who are present at any meeting of such committee and are not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another director to act at such meeting in the place of such absent or disqualified member. -6- Section 217. Absentee Participation in Meetings. A director may participate in a meeting of the Board of Directors or a meeting of a committee established by the Board of Directors by use of a conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other. ARTICLE III. OFFICERS. Section 301. Officers. The officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers and assistant officers as the Board of Directors may from time to time deem advisable. Except for the Chairman of the Board, Chief Executive Officer, President, Secretary and Treasurer, the Board may refrain from filling any of the said offices at any time and from time to time. The same individual may hold any two or more offices. The following officers shall be elected by the Board of Directors at the time, in the manner and for such terms as the Board of Directors from time to time shall determine: Chairman of the Board, Chief Executive Officer, President, Secretary, and Treasurer. The Chairman of the Board may appoint such other officers and assistant officers as he may deem advisable provided such officers or assistant officers have a title no higher than Vice President, who shall hold office for such periods as the Chairman of the Board shall determine. Any officer may be removed at any time, with or without cause, and regardless of the term for which such officer was elected. Section 302. Chairman of the Board. The Chairman of the Board shall be a member of the Board of Directors and shall preside at the meetings of the Board and perform such other duties as may be prescribed by the Board of Directors. Section 303. Chief Executive Officer. The Chief Executive Officer shall have general supervision of all of the departments and business of the Corporation; he or she shall prescribe the duties of the other officers and employees and see to the proper performance thereof. The Chief Executive Officer shall be responsible for having all orders and resolutions of the Board of Directors carried into effect. The Chief Executive Officer shall execute on behalf of the Corporation and may affix or cause to be affixed a seal to all authorized documents and instruments requiring such execution, except to the extent that signing and execution thereof shall have been delegated to some other officer or agent of the Corporation by the Board of Directors or by the Chief Executive Officer. The Chief Executive Officer shall be a member of the Board of Directors. In the absence or disability of the Chairman of the Board or his or her refusal to act, the Chief -7- Executive Officer shall preside at meetings of the Board. In general, the Chief Executive Officer shall perform all the duties and exercise all the powers and authorities incident to his or her office or as prescribed by the Board of Directors. Section 304. President. The President shall perform such duties as are incident to his or her office or prescribed by the Board of Directors or the Chief Executive Officer. In the event of the absence or disability of the Chief Executive Officer or his or her refusal to act, the President shall perform the duties and have the powers and authorities of the Chief Executive Officer. The President shall execute on behalf of the Corporation and may affix or cause to be affixed a seal to all authorized documents and instruments requiring such execution, except to the extent that signing and execution thereof shall have been delegated to some other officer or agent of the Corporation by the Board of Directors or the President. Section 305. Vice Presidents. The Vice Presidents shall perform such duties, do such acts and be subject to such supervision as may be prescribed by the Board of Directors, the Chief Executive Officer or the President. In the event of the absence or disability of the Chief Executive Officer and the President or their refusal to act, the Vice Presidents, in the order of their rank, and within the same rank in the order of their seniority, shall perform the duties and have the powers and authorities of the Chief Executive Officer and President, except to the extent inconsistent with applicable law. Section 306. Secretary. The Secretary shall act under the supervision of the Chief Executive Officer and President or such other officer as the Chief Executive Officer or President may designate. Unless a designation to the contrary is made at a meeting, the Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all of the proceedings of such meetings in a book to be kept for that purpose, and shall perform like duties for the standing committees when required by these Bylaws or otherwise. The Secretary shall keep a seal of the Corporation, and, when authorized by the Board of Directors, Chief Executive Officer or the President, cause the seal to be affixed to any documents and instruments requiring it. The Secretary shall perform such other duties as may be prescribed by the Board of Directors, Chief Executive Officer, President or such other supervising officer as the Chief Executive Officer or President may designate. Section 307. Treasurer. The Treasurer shall act under the supervision of the Chief Executive Officer and President or such other officer as the Chief Executive Officer or President may -8- designate. The Treasurer shall have custody of the Corporation's funds and such other duties as may be prescribed by the Board of Directors, Chief Executive Officer, President or such other supervising officer as the Chief Executive Officer or President may designate. Section 308. Assistant Officers. Unless otherwise provided by the Board of Directors, each assistant officer shall perform such duties as shall be prescribed by the Board of Directors, Chief Executive Officer, President or the officer to whom he or she is an assistant. In the event of the absence or disability of an officer or his or her refusal to act, his or her assistant officers shall, in the order of their rank, and within the same rank in the order of their seniority, have the powers and authorities of such officer. Section 309. Compensation. Unless otherwise provided by the Board of Directors or the Compensation Committee, the salaries and compensation of all officers and assistant officers, except the Chairman of the Board, Chief Executive Officer and President, shall be fixed by or in the manner designated by the Chief Executive Officer. Section 310. General Powers. The officers are authorized to do and perform such corporate acts as are necessary in the carrying on of the business of the Corporation, subject always to the directions of the Board of Directors. ARTICLE IV. PERSONAL LIABILITY AND INDEMNIFICATION. Section 401. Personal Liability of Directors. (a) A director of this Corporation shall not be personally liable, as such, for monetary damages for any action taken, or any failure to take any action, unless: (i) the director has breached or failed to perform the duties of his office under Chapter 17, Subchapter B of the Pennsylvania Business Corporation Law of 1988 (which, as amended from time to time, is hereafter called the Business Corporation Law); and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. (b) This Section 401 shall not apply to a director's liability for monetary damages to the extent prohibited by Section 1713(b) of the Business Corporation Law. -9- Section 402. Mandatory Indemnification. The Corporation shall, to the fullest extent permitted by applicable law, indemnify its directors and officers who were or are a party or are threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (whether or not such action, suit or proceeding arises or arose by or in the right of the Corporation or other entity) by reason of the fact that such director or officer is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, general partner, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans), against expenses (including, but not limited to, reasonable attorneys' and investigation fees and costs), judgments, fines (including excise taxes assessed on a person with respect to any employee benefit plan) and amounts paid in settlement actually and reasonably incurred by such director or officer in connection with such action, suit or proceeding, except as otherwise provided in Section 404 hereof. Persons who were directors or officers of the Corporation prior to the date this Section is approved by members of the Corporation, but who do not hold such office on or after such date, shall not be covered by this Section 402. A director or officer of the Corporation entitled to indemnification under this Section 402 is hereafter called a "person covered by Section 402 hereof". Section 403. Expenses. Expenses incurred by a person covered by Section 402 hereof in defending a threatened, pending or completed civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation, except as otherwise provided in Section 404. Section 404. Exceptions. No indemnification under Section 402 or advancement or reimbursement of expenses under Section 403 shall be provided to a person covered by Section 402 hereof: (a) with respect to expenses or the payment of profits arising from the purchase or sale of securities of the Corporation in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended; (b) if a final unappealable judgment or award establishes that such director or officer engaged in intentional misconduct or a transaction from which the director or officer derived an improper personal benefit; (c) for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, and amounts paid in settlement) which have been paid directly to, or for the benefit of, such person by an -10- insurance carrier under a policy of officers' and directors' liability insurance whose premiums are paid for by the Corporation or by an individual or entity other than such director or officer; and (d) for amounts paid in settlement of any threatened, pending or completed action, suit or proceeding without the written consent of the Corporation, which written consent shall not be unreasonably withheld. The Board of Directors of the Corporation is hereby authorized, at any time by resolution, to add to the above list of exceptions from the right of indemnification under Section 402 or advancement or reimbursement of expenses under Section 403, but any such additional exception shall not apply with respect to any event, act or omission which occurred prior to the date that the Board of Directors in fact adopts such resolution. Any such additional exception may, at any time after its adoption, be amended, supplemented, waived or terminated by further resolution of the Board of Directors of the Corporation. Section 405. Continuation of Rights. The indemnification and advancement or reimbursement of expenses provided by, or granted pursuant to, this Article IV shall continue as to a person who has ceased to be a member, director or officer of the Corporation, and shall inure to the benefit of the heirs, executors and administrators of such person. Section 406. General Provisions. (a) The term "to the fullest extent permitted by applicable law", as used in this Article IV shall mean the maximum extent permitted by public policy, common law or statute. Any person covered by Section 402 hereof may, to the fullest extent permitted by applicable law, elect to have the right to indemnification or to advancement or reimbursement of expenses, interpreted, at such person's option; (i) on the basis of the applicable law on the date this Section was approved by the shareholders; or (ii) on the basis of the applicable law in effect at the time of the occurrence of the event, act or omission giving rise to the action, suit or proceeding, or (iii) on the basis of the applicable law in effect at the time indemnification is sought. (b) The right of a person covered by Section 402 hereof to be indemnified or to receive an advancement or reimbursement of expenses pursuant to Section 403 (i) may be enforced as a contract right pursuant to which the person entitled thereto may bring suit as if the provisions hereof were set forth in a separate written contract between the Corporation and such person; (ii) to the fullest extent permitted by applicable law, is intended to be retroactive and shall be available with respect to events, acts or omissions occurring prior to the adoption hereof; and (iii) shall -11- continue to exist after the rescission or restrictive modification (as determined by such person) of any provision of this Article IV with respect to events, acts and omissions occurring before such rescission or restrictive modification is adopted. (c) If a request for indemnification or for the advancement or reimbursement of expenses pursuant hereto is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation together with all supporting information reasonably requested by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim (plus interest at the prime rate announced from time to time by the Corporation's primary lending bank) and, if successful in whole or in part, the claimant shall be entitled also to be paid the expenses (including, but not limited to, attorneys' and investigation fees and costs) of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or the advancement or reimbursement of expenses to the claimant is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the claimant is not so entitled. (d) The indemnification and advancement or reimbursement of expenses provided by, or granted pursuant to, this Article IV shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement or reimbursement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise. (e) Nothing contained in this Article IV shall be construed to limit the rights and powers the Corporation possesses under Chapter 17, Subchapter D of the Business Corporation Law, or otherwise, including, but not limited to, the powers to purchase and maintain insurance, create funds to secure or insure its indemnification obligations, and any other rights or powers the Corporation may otherwise have under applicable law. (f) The provisions of this Article IV may, at any time (and whether before or after there is any basis for a claim for indemnification or for the advancement or reimbursement of expenses pursuant hereto), be amended, supplemented, waived, or -12- terminated, in whole or in part, with respect to any person covered by Section 402 hereof by a written agreement signed by the Corporation and such person. (g) The Corporation shall have the right to appoint the attorney for a person covered by Section 402 hereof, provided such appointment is not unreasonable under the circumstances. Section 407. Optional Indemnification. The Corporation may, to the fullest extent permitted by applicable law, indemnify, and advance or reimburse expenses for, persons in all situations other than that covered by Section 402. ARTICLE V. SHARES OF CAPITAL STOCK. Section 501. Authority to Sign Share Certificate. Every share certificate of the Corporation shall be signed by the Chairman, Chief Executive Officer or the President and by the Secretary or one of the Assistant Secretaries. If the certificate is signed by a transfer agent or registrar, the signature of any officer of the Corporation on the certificate may be facsimile, engraved or printed. Section 502. Lost or Destroyed Certificates. Any person claiming a share certificate to be lost, destroyed or wrongfully taken shall receive a replacement certificate if such shareholder: (a) requests such replacement certificate before the Corporation has notice that the shares have been acquired by a bona fide purchaser; (b) files with the Corporation an indemnity bond deemed sufficient by the Board of Directors; and (c) satisfies any other reasonable requirements fixed by the Board of Directors. ARTICLE VI. GENERAL. Section 601. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 602. Record Date. The Board of Directors may fix any time prior to the date of any meeting of shareholders as a record date for the determination of shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than ninety (90) days prior to the date of the meeting of shareholders. The Board of Directors may fix any time whatsoever (whether or not the same is more than ninety (90) days) prior to the date for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or will go into effect, as a record date for the determination -13- of the shareholders entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. Section 603. Emergency Bylaws. In the event of any emergency resulting from an attack on the United States, a nuclear disaster or another catastrophe as a result of which a quorum cannot be readily assembled and during the continuance of such emergency, the following Bylaw provisions shall be in effect, notwithstanding any other provisions of these Bylaws. (a) A meeting of the Board of Directors or of any committee thereof may be called by any officer or director upon one hour's notice to all persons entitled to notice whom, in the sole judgment of the notifier, it is feasible to notify; (b) The director or directors in attendance at the meeting of the Board of Directors or of any committee thereof shall constitute a quorum; and (c) These Bylaws may be amended or repealed, in whole or in part, by a majority vote of the directors attending any meeting of the Board of Directors, provided such amendment or repeal shall only be effective for the duration of such emergency. Section 604. Severability. If any provision of these Bylaws is illegal or unenforceable as such, such illegality or unenforceability shall not affect any other provision of these Bylaws and such other provisions shall continue in full force and effect. ARTICLE VII. AMENDMENTS. Section 701. Amendment or Repeal by the Board of Directors. Except as provided by applicable law, these Bylaws may be amended or repealed, in whole or in part, by a majority vote of the incumbent directors (as defined herein) on the Board of Directors. The term "incumbent director", as used herein, shall mean any director of the Corporation on the date hereof and any other director whose election or appointment by the Board of Directors of the Corporation, or whose nomination for election by the shareholders of the Corporation, was approved by a vote of at least a majority of the directors then in office who either were directors on the date hereof or whose election or appointment or nomination for election was previously so approved. Section 702. Amendment or Repeal by Shareholders. These Bylaws may be amended or repealed, in whole or in part, by -14- shareholders as follows: (i) in the case of an amendment or repeal which has previously received the approval of at least a majority of the incumbent directors (as defined herein) on the Board of Directors, by a majority of the votes cast by shareholders at any duly convened annual or special meeting of the shareholders; and (ii) in the case of an amendment or repeal which has not previously received the approval of at least a majority of the incumbent directors of the Board of Directors, by the affirmative vote of the shareholders entitled to cast at least sixty-five percent (65%) of the votes entitled to be cast by all shareholders at any duly convened annual or special meeting of the shareholders. This Section 702 may be amended or repealed, in whole or in part, only by the affirmative vote of the shareholders entitled to cast at least sixty-five percent (65%) of the votes entitled to be cast by all shareholders at any duly convened annual or special meeting of the shareholders. The term "incumbent director", as used herein, shall mean any director of the Corporation on the date hereof and any other director whose election or appointment by the Board of Directors of the Corporation, or whose nomination for election by the shareholders of the Corporation, was approved by a vote of at least a majority of the directors then in office who either were directors on the date hereof or whose election or appointment or nomination for election was previously so approved. Section 703. Recording Amendments. The text of all amendments to these Bylaws shall be attached hereto, and a notation of the date of its adoption and a notation of whether it was adopted by the directors or the shareholders shall be made in Section 802 hereof. ARTICLE VIII. ADOPTION OF BYLAWS AND RECORD OF AMENDMENTS THERETO. Section 801. Adoption and Effective Date. These Bylaws have been adopted and approved by the Board of Directors of the Corporation on September 27, 1996 and by the shareholders of the Corporation on September 27, 1996. These Bylaws shall be effective as of September 27, 1996. Section 802. Amendments to Bylaws. Section Amended Date Amended Adopted By - --------------- ------------ ---------- -15- EX-4 5 EXHIBIT 4.1 NCO GROUP, INC. INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA NUMBER SHARES --------------- --------------- | | | | | | | | | | | | --------------- --------------- COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 628858102 THIS IS TO CERTIFY THAT IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF ======================== NCO GROUP, INC. ======================== transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. The shares represented by this certificate are issued and held subject to all of the restrictions, conditions and provisions set forth in the Articles of Incorporation of the Corporation, to all of which the holder hereof agrees by the acceptence of this certificate. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and facsimile signatures of its duly authorized officers. Dated: NCO GROUP, INC. CORPORATE SEAL 1996 PENNSYLVANIA /s/ /s/ - --------------------------- ------------------------ SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: ChaseMellon Shareholder TRANSFER AGENT & Services, L.L.C. REGISTRAR AUTHORIZED SIGNATURE NCO GROUP, INC. The Corporation will furnish to any shareholder upon request and without charge, a full or summary statement of the designations, voting rights, preferences, limitations and special rights of the shares of each class or series capital stock authorized to be issued so far as they have been fixed and determined and the authority of the board of directors to fix and determine the designations, voting rights, preferences, limitations and special rights of the classes and series of shares of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ________Custodian________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act ________________________________ in common (State)
Additional abbreviations may also be used though not in the above list. For Value Received, _______________________________________ hereby sell, assign and transfer PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE -------------------------------------- | | | | | | -------------------------------------- unto - ------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------ the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ------------------------------------------- Attorney - ---------------------------------------------------------------------- to transfer the said shares on the books of the within named Corporation with full power of substitution in the premises. Dated, ----------------------- ----------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. EX-5 6 EXHIBIT 5.1 EXHIBIT 5.1 (215) 569-5500 October 16, 1996 NCO Group, Inc. 1740 Walton Road Blue Bell, PA 19422-0987 Re: NCO Group, Inc.. Registration Statement on Form S-1 (File No. 333-11745 ) ----------------------------------------- Gentlemen: We have acted as counsel to NCO Group, Inc. (the "Company") in connection with the Registration Statement on Form S-1 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, relating to (i) the offer and sale by the Company of 2,500,000 shares of Common Stock, no par value (the "Common Stock") and (ii) the offer and sale by the Selling Shareholders named in the Registration Statement ("Selling Shareholders") of up to 375,000 shares of Common Stock to be purchased at the option of the Underwriters to cover over-allotments, if any. This opinion is furnished pursuant to the requirements of Item 601(b)(5) of Regulation S-K. In rendering this opinion, we have examined only the following documents: (i) the Company's Amended and Restated Articles of Incorporation and Bylaws, (ii) resolutions adopted by the Board of Directors relating to the Offering, (iii) the Company's minute book and stock records books since the date of incorporation of NCO Group, Inc. and (iv) the Registration Statement, as amended. We have not performed any independent investigation other than the document examination described. We have assumed and relied, as to questions of fact and mixed questions of law and fact, on the truth, completeness, authenticity and due authorization of all certificates, documents and records examined and the genuineness of all signatures. This NCO Group, Inc. October 16, 1996 Page 2 opinion is limited to the laws of the Commonwealth of Pennsylvania. Based upon and subject to the foregoing, we are of the opinion that (i) the shares of Common Stock of the Company which are being offered and sold by the Company pursuant to the Registration Statement, when sold in the manner and for the consideration contemplated by the Registration Statement, will be legally issued, fully paid and non-assessable, and (ii) the shares of Common Stock of the Company which are being offered and sold by the Selling Shareholders pursuant to the Registration Statement are legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus, which is part of the Registration Statement. Sincerely, /s/ Blank Rome Comisky & McCauley --------------------------------- BLANK ROME COMISKY & McCAULEY EX-10 7 EXHIBIT 10.1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of the _____ day of _____________ 1996, between NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation with its principal offices at 1740 Walton Road, Blue Bell, PA 19422 (the "Company") and BERNARD R. MILLER, an individual residing at 1723 Country Club Drive, Cherry Hill, N.J., (the "Employee"). In consideration of their mutual promises and covenants set forth herein, and intending to be legally bound hereby, the Company and the Employee agree as follows: 1. Employment. The Company hereby employs the Employee and the Employee accepts such employment on the terms and conditions hereinafter set forth. 2. Term. The term of this Agreement shall be for a period of five (5) years commencing on the date hereof (the "Term"). 3. Duties. The Employee is engaged hereunder as the Company's Senior Vice President with his duties including, but not being limited to, heading and advising on general planning and development strategies for the Company, and such other or further duties and services of a similar nature as may be reasonably required of him or assigned to him by the Company's Chief Executive Officer or Board of Directors. Employee shall at all times be subject to the supervision of the President and Board of Directors of the Company. The Employee shall devote his full business time, attention, energies and best efforts to the performance of his duties hereunder and to the promotion of the business and interests of the Company and of any corporate subsidiaries or affiliated companies. 4. Compensation; Benefits; and Expenses. (a) Compensation. In addition to the items set forth below, the Employee's compensation for the services to be provided by him pursuant to this Agreement is set forth on the attached Exhibit "A". (b) Benefits. The Employee shall be entitled to participate in all insurance, vacation and other fringe benefit 1 programs of the Company to the extent and on the same terms and conditions as are accorded to other executive employees of the Company. As part of the above, the Employee's benefits shall include disability insurance (75% of the Base Salary)commencing as of June 1, 1994, with respect to life insurance, in addition to the Company's rights as set forth at paragraph 5 below, the Company agrees to pay up to $1,500 per quarter (three (3) month period) toward any additional life insurance owned or beneficially owned by the Employee upon presentation by the Employee of premium invoices to the Company and the company shall receive the right to the equity held in such policy, with the death benefit payable to the Employee or the Employee's designated beneficiaries net of such equity in the policy. The Employee and the Company agree that the sole tax implication of this Agreement is that the Company shall include the "economic benefit" of such policy annually in the Employee's compensation. Furthermore, the Employee shall receive a car leased by the Company, to the Employee's reasonable satisfaction. (c) Business Expenses. The Company will pay, or reimburse the Employee for, all ordinary and reasonable out-of-pocket business expenses incurred by the Employee in connection with his performance of services hereunder during the employment term in accordance with the Company's expense authorization and approval procedures then in effect upon presentation to the Company of an itemized account and written proof of such expenses. All expenses related to the operation of the Employee's car shall be covered by the Company. (d) Entire Compensation. The compensation provided for in this Agreement is in full payment of the services to be rendered by the Employee to the Company hereunder. 5. Insurance. The Company, in its sole discretion and at its own expense, may apply for and procure in its own name and for its own benefit or the benefit of the Employee key man or buy-sell life insurance on the life of the Employee in any amount or amounts considered advisable by the Company, and the Employee shall submit to any medical or other examination and execute and deliver such application or other instrument as may be reasonably necessary to effectuate such insurance. The Company shall also have the right to assume any insurance policies of the Employee in existence at the time employment hereunder commences. At such time as the 2 Employee's employment is terminated or if the Employee ceases to be a shareholder in the Company, the Employee shall have the right to purchase from the Company any insurance policies at such policy's cash surrender value, owned in whole or in part by the Company on the life or health of the Employee. 6. Death or Total Disability of the Employee. (a) Death. In the event of the death of the Employee during the Term of this Agreement or any extension thereof, compensation payments shall continue in accordance with the provisions of paragraph 8 of this Agreement. (b) Total Disability. In the event of the Total Disability (as that term is hereinafter defined) of the Employee, the Company shall have the right to terminate the Employee's employment hereunder by giving the Employee thirty (30) days' written notice thereof. The foregoing notwithstanding, compensation payments shall continue in accordance with the provisions of paragraph 8 of this Agreement, provided that if the Employee, during any period of disability, including after termination of this Agreement, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by the Company, the amount of the Base Salary that the Employee would be entitled to receive from the Company shall be decreased by the amounts of such payments. The term "Total Disability," when used herein, shall mean a mental, emotional or physical condition which rendered the Employee for a period of six (6) consecutive months, during the Term of this Agreement, unable or incompetent to carry out, on a substantially full-time basis, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. The Employee agrees, in the event of any dispute as to the determination made pursuant to this paragraph, to submit to a physical or other examination by a licensed physician selected by the Company, the cost of which examination shall be paid by the Company. 7. Termination of Employment. In addition to termination pursuant to paragraph 6 above, the Company, following prior written notice to the Employee, may discharge the Employee and thereby terminate his employment hereunder for the following reasons: (a) ("for cause") (i) habitual intoxication; (ii) refusal to submit to treatment of an existing drug addiction; (iii) conviction of a felony; (iv) willful misconduct by the Employee in connection with the performance of his duties; (v) dishonesty, fraud or misappropriation of funds of the Company; (vi) insubordination or refusal to comply with a lawful directive of the Chief Executive Officer of the Company or his designee; or (vii) the Employee's breach of this Agreement in any manner or respect which is committed in bad faith and without reasonable belief that such action is in the best interest of the Company. 3 8. Payment Upon Termination. If the Employee dies during the Term, or if this Agreement is terminated by the Company for any reason other than the causes set forth in paragraph 7 hereof, the Company shall continue to pay the Employee's full compensation, including bonuses, for the balance of the Term. Such compensation shall be paid to the Employee, or his widow, or, if she is not then living, to the Employee's estate. If the Employee is terminated for any reason set forth in Section 7 hereof or if the Employee voluntarily terminates his employment, he shall receive no further compensation except such amounts as shall have accrued as of the date of termination. 9. Non-Disclosure. The Employee recognizes and acknowledges that he will have access to certain confidential information of the Company and that such information constitutes valuable, special and unique property of the Company. The Employee agrees that he will not, for any reason or purpose whatsoever, during or after the term of his employment, disclose any of such confidential information to any party without express authorization of the Company, except as necessary in the ordinary course of performing his duties hereunder. 10. Noncompetition. The Employee agrees that during the term of this Agreement and any extension thereof, and for a period of two (2) years after the Company ceases to pay the Employee any compensation pursuant to the terms of this Agreement, the Employee shall not, unless acting pursuant hereto or with the prior written consent of the Board of Directors of the Company, directly or indirectly: (a) solicit business from or perform services for, any person, company or other entity which at any time during the Employee's employment by the Company is a client or customer of the Company if such business or services are of the same general character as those engaged in or performed by the Company; (b) solicit for employment or in any other fashion hire any of the employees of the Company; (c) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with any business or enterprise engaged in the business of debt collection or any other business engaged in by the Company or any of its affiliates in all those geographic areas in which the Company or any of its affiliates does business; 4 (d) use or permit his name to be used in connection with any business or enterprise engaged in the business of debt collection or any other business engaged in by the Company or any of its affiliates in all those geographic area in which the Company or any of its affiliates does business; or (e) use the name of the Company or any name similar thereto, but nothing in this clause shall be deemed, by implication, to authorize or permit use of such name after expiration of the period covered by this paragraph. In the event that any provisions of this paragraph should ever be adjudicated to exceed the time, geographic, service or product limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, service or product limitations permitted to applicable law. 11. Equitable Relief; Survival. (a) The Employee acknowledges that the restrictions contained in paragraphs 9 and 10 hereof are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of any provisions of those paragraph will result in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to temporary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence and action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdictions and Employee further irrevocably submits to the jurisdiction of any Pennsylvania court of Federal court sitting in the Eastern District of Pennsylvania over any suit, action or proceeding arising out of or relating to paragraphs 8 or 9. The Employee hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to such jurisdiction or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in any inconvenient forum. Effective 5 service of process may be made upon the Employee by mail under the notice provisions contained in paragraph 14 hereof. (b) Survival of Covenants. The provisions of paragraphs 8, 9 and 10 shall survive the termination of this Agreement. 12. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Employment Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as may be deemed expedient or necessary by the Company in its sole discretion. 13. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 14. Notices. All notices, request, demands, claims and other communications hereunder will be in writing. Any notices, requests, demands, claims or communications hereunder shall be deemed fully given if such are sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: 1740 Walton Road Blue Bell, PA 19422 with copy to: Joshua Gindin, Esquire 230 S. Broad St., 20th Floor Philadelphia, PA 19102 6 If to the Employee: 1723 Country Club Drive Cherry Hill, NJ 08003 Any party hereto may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, facsimile, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party hereto may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties hereto notice in the manner herein set forth. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the Commonwealth of Pennsylvania. 16. Indemnification: The Company shall indemnify the Employee and hold him harmless for all acts or decisions made by him in good faith while performing services for the Company. the Company shall pay all expenses including attorney's fees, actually and necessarily incurred by the Employee in connection with the defense of any act, suit or proceeding and in connection with any related appeal including the cost of court settlements. 17. Contents of Agreement; Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes and is instead of all other employment arrangement between the Employee and the Company. This agreement cannot be changed, modified or terminated except upon written amendment duly executed by the parties hereto. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors 7 and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. Attest: NCO Financial Systems, Inc. [SEAL] BY: -------------------------- Michael Barrist, President Witness: The Employee: --------------------------- ----------------------------- Bernard R. Miller 8 EXHIBIT "A" COMPENSATION A. Base Salary: The Employee shall be paid a base salary of One Hundred Thirty Five Thousand Dollars ($135,000) per year (the "Base Salary"), to be adjusted each year in accordance with the Consumer Price Index ("CPI") in effect for such year, payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. B. Bonus: The Employee shall, in addition to the Base Salary, receive an annual bonus as shall be determined by the Company's Board of Directors. C. Stock Option Plan: The Employee shall participate in such Stock Option Plan or Plans as shall be determined by the Company's Board of Directors. 9 EX-10 8 EXHIBIT 10.2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of the _____ day of _____________ 1996, between NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation with its principal offices at 1740 Walton Road, Blue Bell, PA 19422 (the "Company") and MICHAEL BARRIST, an individual, residing at 280 Kerry Lane, Blue Bell, PA 19422, (the "Executive"). In consideration of their mutual promises and covenants set forth herein, and intending to be legally bound hereby, the Company and the Executive agree as follows: 1. Employment. The Company hereby employs the Executive and the Executive accepts such employment on the terms and conditions hereinafter set forth. 2. Term. The term of this Agreement shall be for a period of five (5) years commencing on the date hereof (the "Term"). 3. Duties. The Executive is engaged hereunder as the Company's President and Chief Executive Officer. During the Term the Executive shall devote his full business time to the operations of the Company and shall perform duties customarily incident to such offices and all other duties the Board of Directors of the Company may from time to time assign to him. 4. Compensation; Benefits; and Expenses. (a) Compensation. In addition to the items set forth below, the Executive's compensation for the services to be provided by him pursuant to this Agreement is set forth on the attached Exhibit "A". (b) Benefits. The Executive shall be entitled to participate in all insurance, vacation and other fringe benefit programs of the Company to the extent and on the same terms and conditions as are accorded to other executive employees of the Company. In addition, the Executive shall be entitled to such other benefits as may be commensurate with his status as President and Chief Executive Officer of the Company. Furthermore, the Executive shall receive a car leased by the Company, to the Executive's reasonable satisfaction and the Company shall make available, from time-to-time and as needed, as the Executive, in 1 his sole discretion may determine, a four (4) wheel drive vehicle, selected by the Executive. (c) Business Expenses. The Company will pay, or reimburse the Executive for, all ordinary and reasonable out-of-pocket business expenses incurred by the Executive in connection with his performance of services hereunder during the employment term in accordance with the Company's expense authorization and approval procedures then in effect upon presentation to the Company of an itemized account and written proof of such expenses. All expenses related to the operation of the Executive's cars shall be covered by the Company. (d) Entire Compensation. The compensation provided for in this Agreement is in full payment of the services to be rendered by the Executive to the Company hereunder. 5. Insurance. The Company, in its sole discretion and at its own expense, may apply for and procure in its own name and for its own benefit or the benefit of the Executive key man or buy-sell life insurance on the life of the Executive in any amount or amounts considered advisable by the Company, and the Executive shall submit to any medical or other examination and execute and deliver such application or other instrument as may be reasonably necessary to effectuate such insurance. The Company shall also have the right to assume any insurance policies of the Executive in existence at the time employment hereunder commences. At such time as the Executive's employment is terminated or if the Executive ceases to be a shareholder in the Company, the Executive shall have the right to purchase from the Company any insurance policies at such policy's cash surrender value, owned in whole or in part by the Company on the life or health of the Executive. 6. Death or Total Disability of the Executive. (a) Death. In the event of the death of the Executive during the Term of this Agreement or any extension thereof, compensation payments shall continue in accordance with the provisions of paragraph 8 of this Agreement. (b) Total Disability. In the event of the Total Disability (as that term is hereinafter defined) of the Executive, the Company shall have the right to terminate the Executive's employment hereunder by giving the Executive thirty (30) days' 2 written notice thereof. The foregoing notwithstanding, compensation payments shall continue in accordance with the provisions of paragraph 8 of this Agreement, provided that if the Executive, during any period of disability, including after termination of this Agreement, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by the Company, the amount of the Base Salary that the Executive would be entitled to receive from the Company shall be decreased by the amounts of such payments. The term "Total Disability," when used herein, shall mean a mental, emotional or physical condition which rendered the Executive for a period of twelve (12) consecutive months, during the Term of this Agreement, unable or incompetent to carry out, on a substantially full-time basis, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. The Executive agrees, in the event of any dispute as to the determination made pursuant to this paragraph, to submit to a physical or other examination by a licensed physician selected by the Company, the cost of which examination shall be paid by the Company. 7. Termination of Employment. In addition to termination pursuant to paragraph 6 above, the Company, following prior written notice to the Employee, may discharge the Employee and thereby terminate his employment hereunder for the following reasons: (a) ("for cause") (i) habitual intoxication; (ii) refusal to submit to treatment of an existing drug addiction; (iii) conviction of a felony; (iv) willful misconduct by the Employee in connection with the performance of his duties; (v) dishonesty, fraud or misappropriation of funds of the Company; (vi) insubordination or refusal to comply with a lawful directive of the Chief Executive Officer of the Company or his designee; or (vii) the Employee's breach of this Agreement in any manner or respect which is committed in bad faith and without reasonable belief that such action is in the best interest of the Company. 8. Payment Upon Termination. If the Employee dies during the Term, or if this Agreement is terminated by the Company for any reason other than the causes set forth in paragraph 7 hereof, the Company shall continue to pay the Employee's full compensation, including bonuses, for the balance of the Term. Such compensation shall be paid to the Employee, or his widow, or, if she is not then living, to the Employee's estate. If the Employee is terminated for any reason set forth in Section 7 hereof or if the Employee voluntarily terminates his employment, he shall receive no further compensation except such amounts as shall have accrued as of the date of termination. 9. Non-Disclosure. The Executive recognizes and acknowledges that he will have access to certain confidential information of the Company and that such information constitutes valuable, special and unique property of the Company. The Executive agrees that he will not, for any reason or purpose whatsoever, during or after the term of his employment, disclose any of such confidential information to any party without express authorization of the Company, except as necessary in the ordinary course of performing his duties hereunder. 10. Noncompetition. The Executive agrees that during the term of this Agreement and any extension thereof, and for a period 3 of two (2) years after the Company ceases to pay the Executive any compensation pursuant to the terms of this Agreement, the Executive shall not, unless acting pursuant hereto or with the prior written consent of the Board of Directors of the Company, directly or indirectly: (a) solicit business from or perform services for, any person, company or other entity which at any time during the Executive's employment by the Company is a client or customer of the Company if such business or services are of the same general character as those engaged in or performed by the Company; (b) solicit for employment or in any other fashion hire any of the employees of the Company; (c) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with any business or enterprise engaged in the business of debt collection or any other business engaged in by the Company or any of its affiliates in all those geographic areas in which the Company or any of its affiliates does business; (d) use or permit his name to be used in connection with any business or enterprise engaged in the business of debt collection or any other business engaged in by the Company or any of its affiliates in all those geographic area in which the Company or any of its affiliates does business; or (e) use the name of the Company or any name similar thereto, but nothing in this clause shall be deemed, by implication, to authorize or permit use of such name after expiration of the period covered by this paragraph. In the event that any provisions of this paragraph should ever be adjudicated to exceed the time, geographic, service or product limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, service or product limitations permitted to applicable law. 4 11. Equitable Relief; Survival. (a) The Executive acknowledges that the restrictions contained in paragraphs 9 and 10 hereof are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of any provisions of those paragraph will result in irreparable injury to the Company. The Executive also acknowledges that the Company shall be entitled to temporary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence and action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdictions and Executive further irrevocably submits to the jurisdiction of any Pennsylvania court of Federal court sitting in the Eastern District of Pennsylvania over any suit, action or proceeding arising out of or relating to paragraphs 9 or 10. The Executive hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to such jurisdiction or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in any inconvenient forum. Effective service of process may be made upon the Executive by mail under the notice provisions contained in paragraph 14 hereof. (b) Survival of Covenants. The provisions of paragraphs 8, 9 and 10 shall survive the termination of this Agreement. 12. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Employment Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as may be deemed expedient or necessary by the Company in its sole discretion. 5 13. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 14. Notices. All notices, request, demands, claims and other communications hereunder will be in writing. Any notices, requests, demands, claims or communications hereunder shall be deemed fully given if such are sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: 1740 Walton Road Blue Bell, PA 19422 with copy to: Joshua Gindin, Esquire 230 S. Broad St., 20th Floor Philadelphia, PA 19102 If to the Executive: 280 Kerry Lane Blue Bell, PA 19422 Any party hereto may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, facsimile, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party hereto may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties hereto notice in the manner herein set forth. 6 15. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the Commonwealth of Pennsylvania. 16. Indemnification: The Company shall indemnify the Executive and hold him harmless for all acts or decisions made by him in good faith while performing services for the Company. The Company shall pay all expenses including attorney's fees, actually and necessarily incurred by the Executive in connection with the defense of any act, suit or proceeding and in connection with any related appeal including the cost of court settlements. 17. Contents of Agreement; Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes and is instead of all other employment arrangement between the Executive and the Company. This agreement cannot be changed, modified or terminated except upon written amendment duly executed by the parties hereto. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and 7 responsibilities of the Executive hereunder are of a personal nature and shall not be assignable in whole or in part by the Executive. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. Attest: NCO Financial Systems, Inc. ______________________[SEAL] BY: ----------------------------- Charles C. Piola, Jr. Executive Vice President Witness: The Executive: --------------------------- ----------------------------- Michael Barrist 8 EXHIBIT "A" COMPENSATION A. Base Salary: The Executive shall be paid a base salary of Two Hundred Seventy Five Thousand Dollars ($275,000) per year (the "Base Salary"), to be adjusted each year in accordance with the Consumer Price Index ("CPI") in effect for such year, payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. B. Bonus: In addition to the Base Salary, the Executive shall be entitled to receive an annual bonus as follows: (a) $50,000 if the Company reaches it performance goals as reasonably determined by its Board of Directors; or (b) $100,000 if the Company achieves a twenty percent (20%) growth in its "net income" (adjusted for dilution) (as indicated in the Company's annual financial statements) over the previous year; and (c) An amount equal to five percent (5%) of the increased net income of the Company, in excess of twenty percent (20%) as determined in (b) above. C. Stock Option Plan: The Executive shall participate in such Stock Option Plan or Plans as shall be determined by the Company's Board of Directors. 9 EX-10 9 EXHIBIT 10.3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of the _____ day of _____________ 1996, between NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation with its principal offices at 1740 Walton Road, Blue Bell, PA 19422 (the "Company") and CHARLES C. PIOLA, JR., an individual residing at 339 Barnhill Road, West Chester, PA 19382, (the "Employee"). In consideration of their mutual promises and covenants set forth herein, and intending to be legally bound hereby, the Company and the Employee agree as follows: 1. Employment. The Company hereby employs the Employee and the Employee accepts such employment on the terms and conditions hereinafter set forth. 2. Term. The term of this Agreement shall be for a period of five (5) years commencing on the date hereof (the "Term"). 3. Duties. The Employee is engaged hereunder as the Company's Executive Vice President, Sales and Marketing, with his duties including, but not being limited to, heading the Company's sales and marketing department and advising on general sales, marketing and business development planning strategies for the Company, and such other or further duties and services of a similar nature as may be reasonably required of him or assigned to him by the Company's Chief Executive Officer or Board of Directors. Employee shall at all times be subject to the supervision of the Board of Directors of the Company. The Employee shall devote his full business time, attention, energies and best efforts to the performance of his duties hereunder and to the promotion of the business and interests of the Company and of any corporate subsidiaries or affiliated companies. 4. Compensation; Benefits; and Expenses. (a) Compensation. In addition to the items set forth below, the Employee's compensation for the services to be provided by him pursuant to this Agreement is set forth on the attached Exhibit "A". (b) Benefits. The Employee shall be entitled to participate in all insurance, vacation and other fringe benefit programs of the Company to the extent and on the same terms and 1 conditions as are accorded to other executive employees of the Company. In addition, the Employee shall receive a car leased by the Company, to the Employee's reasonable satisfaction. (c) Business Expenses. The Company will pay, or reimburse the Employee for, all ordinary and reasonable out-of-pocket business expenses incurred by the Employee in connection with his performance of services hereunder during the employment term in accordance with the Company's expense authorization and approval procedures then in effect upon presentation to the Company of an itemized account and written proof of such expenses. All expenses related to the operation of the Employee's car shall be covered by the Company. (d) Entire Compensation. The compensation provided for in this Agreement is in full payment of the services to be rendered by the Employee to the Company hereunder. 5. Insurance. The Company, in its sole discretion and at its own expense, may apply for and procure in its own name and for its own benefit or the benefit of the Employee key man or buy-sell life insurance on the life of the Employee in any amount or amounts considered advisable by the Company, and the Employee shall submit to any medical or other examination and execute and deliver such application or other instrument as may be reasonably necessary to effectuate such insurance. The Company shall also have the right to assume any insurance policies of the Employee in existence at the time employment hereunder commences. At such time as the Employee's employment is terminated or if the Employee ceases to be a shareholder in the Company, the Employee shall have the right to purchase from the Company any insurance policies at such policy's cash surrender value, owned in whole or in part by the Company on the life or health of the Employee. 6. Death or Total Disability of the Employee. (a) Death. In the event of the death of the Employee during the Term of this Agreement or any extension thereof, compensation payments shall continue in accordance with the provisions of paragraph 8 of this Agreement. (b) Total Disability. In the event of the Total Disability (as that term is hereinafter defined) of the Employee, the Company shall have the right to terminate the Employee's employment hereunder by giving the Employee thirty (30) days' 2 written notice thereof. The foregoing notwithstanding, compensation payments hereunder shall continue in accordance with the provisions of paragraph 8 of this Agreement, provided that if the Employee, during any period of disability, including after termination of this Agreement, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by the Company, the amount of the Base Salary that the Employee would be entitled to receive from the Company shall be decreased by the amounts of such payments. The term "Total Disability," when used herein, shall mean a mental, emotional or physical condition which rendered the Employee for a period of six (6) consecutive months, during the Term of this Agreement, unable or incompetent to carry out, on a substantially full-time basis, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. The Employee agrees, in the event of any dispute as to the determination made pursuant to this paragraph, to submit to a physical or other examination by a licensed physician selected by the Company, the cost of which examination shall be paid by the Company. 7. Termination of Employment. In addition to termination pursuant to paragraph 6 above, the Company, following prior written notice to the Employee, may discharge the Employee and thereby terminate his employment hereunder for the following reasons: (a) ("for cause") (i) habitual intoxication; (ii) refusal to submit to treatment of an existing drug addiction; (iii) conviction of a felony; (iv) willful misconduct by the Employee in connection with the performance of his duties; (v) dishonesty, fraud or misappropriation of funds of the Company; (vi) insubordination or refusal to comply with a lawful directive of the Chief Executive Officer of the Company or his designee; or (vii) the Employee's breach of this Agreement in any manner or respect which is committed in bad faith and without reasonable belief that such action is in the best interest of the Company. 8. Payment Upon Termination. If the Employee dies during the Term, or if this Agreement is terminated by the Company for any reason other than the causes set forth in paragraph 7 hereof, the Company shall continue to pay the Employee's full compensation, including bonuses, for the balance of the Term. Such compensation shall be paid to the Employee, or his widow, or, if she is not then living, to the Employee's estate. If the Employee is terminated for any reason set forth in Section 7 hereof or if the Employee voluntarily terminates his employment, he shall receive no further compensation except such amounts as shall have accrued as of the date of termination. 9. Non-Disclosure. The Employee recognizes and acknowledges that he will have access to certain confidential information of the Company and that such information constitutes valuable, special and unique property of the Company. The Employee agrees that he will not, for any reason or purpose whatsoever, during or after the term of his employment, disclose any of such confidential information to any party without express authorization of the Company, except as necessary in the ordinary course of performing his duties hereunder. 10. Noncompetition. The Employee agrees that during the term of this Agreement and any extension thereof, and for a period of 3 two (2) years after the Company ceases to pay the Employee any compensation pursuant to the terms of this Agreement, the Employee shall not, unless acting pursuant hereto or with the prior written consent of the Board of Directors of the Company, directly or indirectly: (a) solicit business from or perform services for, any person, company or other entity which at any time during the Employee's employment by the Company is a client or customer of the Company if such business or services are of the same general character as those engaged in or performed by the Company; (b) solicit for employment or in any other fashion hire any of the employees of the Company; (c) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with any business or enterprise engaged in the business of debt collection or any other business engaged in by the Company or any of its affiliates in all those geographic areas in which the Company or any of its affiliates does business; (d) use or permit his name to be used in connection with any business or enterprise engaged in the business of debt collection or any other business engaged in by the Company or any of its affiliates in all those geographic area in which the Company or any of its affiliates does business; or (e) use the name of the Company or any name similar thereto, but nothing in this clause shall be deemed, by implication, to authorize or permit use of such name after expiration of the period covered by this paragraph. In the event that any provisions of this paragraph should ever be adjudicated to exceed the time, geographic, service or product limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, service or product limitations permitted to applicable law. 4 11. Equitable Relief; Survival. (a) The Employee acknowledges that the restrictions contained in paragraphs 9 and 10 hereof are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of any provisions of those paragraph will result in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to temporary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence and action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdictions and Employee further irrevocably submits to the jurisdiction of any Pennsylvania court of Federal court sitting in the Eastern District of Pennsylvania over any suit, action or proceeding arising out of or relating to paragraphs 8 or 9. The Employee hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to such jurisdiction or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in any inconvenient forum. Effective service of process may be made upon the Employee by mail under the notice provisions contained in paragraph 14 hereof. (b) Survival of Covenants. The provisions of paragraphs 8, 9 and 10 shall survive the termination of this Agreement. 12. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Employment Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as may be deemed expedient or necessary by the Company in its sole discretion. 13. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such 5 provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 14. Notices. All notices, request, demands, claims and other communications hereunder will be in writing. Any notices, requests, demands, claims or communications hereunder shall be deemed fully given if such are sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: 1740 Walton Road Blue Bell, PA 19422 with copy to: Joshua Gindin, Esquire 230 S. Broad St., 20th Floor Philadelphia, PA 19102 If to the Employee: 339 Barnhill Road West Chester, PA 19382 Any party hereto may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, facsimile, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party hereto may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties hereto notice in the manner herein set forth. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the Commonwealth of Pennsylvania. 16. Indemnification: The Company shall indemnify the Employee and hold him harmless for all acts or decisions made by 6 him in good faith while performing services for the Company. the Company shall pay all expenses including attorney's fees, actually and necessarily incurred by the Employee in connection with the defense of any act, suit or proceeding and in connection with any related appeal including the cost of court settlements. 17. Contents of Agreement; Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes and is instead of all other employment arrangement between the Employee and the Company. This agreement cannot be changed, modified or terminated except upon written amendment duly executed by the parties hereto. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. Attest: NCO Financial Systems, Inc. [SEAL] BY: - ---------------------------- ----------------------------- Michael Barrist, President Witness: - ---------------------------- ----------------------------- Charles C. Piola, Jr. 7 EXHIBIT "A" COMPENSATION A. Base Salary: The Employee shall be paid a base salary of Two Hundred Thousand Dollars ($200,000) per year (the "Base Salary"), to be adjusted each year in accordance with the Consumer Price Index ("CPI") in effect for such year, payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. B. Bonus: In addition to the Base Salary, the Employee shall be entitled to receive an annual bonus. The annual bonus shall be based upon the Company's annual increase in "net income" (adjusted for dilution) as follows: (i) Twenty percent (20%) growth in net income - $50,000; (ii) Thirty percent (30%) growth in net income - $75,000; or (iii) Forty percent (40%) growth in net income - $10,000. C. Stock Option Plan: The Employee shall participate in such Stock Option Plan or Plans as shall be determined by the Company's Board of Directors. 8 EX-10 10 EXHIBIT 10.4 EMPLOYMENT AGREEMENT THIS AGREEMENT dated this ____ day of ______, 1996 is made between NCO FINANCIAL SYSTEMS, INC., whose address is 1740 Walton Road, Blue Bell, PA 19422 referred to as the "Company" and JOSEPH C. MCGOWAN, an individual, residing at 627 West Wiltshire Drive, Wallingford, PA 19086 (the "Employee"). In consideration of their mutual promises and covenants set forth herein, and intending to be legally bound hereby, the Company and the Employee agree as follows: 1. Employment. The Company hereby employs the Employee as the Company's Vice President of Operations and the Employee hereby accepts such employment in accordance with the terms and conditions of this contract. 2. Duties of the Employee. As Vice President of Operations, the Employee shall be in charge of the Company's collection operations, and shall have full authority and responsibility, subject to the general direction, approval and control of the Company's Executive Officers and Board of Directors, for formulating general collection policies, procedures and such other or further duties and services of a similar nature as may be reasonably required of him or assigned to him by the Company's Executive Officers or Board of Directors. The Employee shall at all times be subject to the supervision of the Executive Officers and Board of Directors of the Company. The Employee shall devote his full business time, attention, energies and best efforts to the performance of his duties hereunder and to the promotion of the business and interests of the Company and of any corporate subsidiaries or affiliated companies. 3. Term of Employment. The term of employment shall begin on the date hereof and continue for a term of five (5) years (the "Term"). The Company shall have the option, subject to the Employee's consent, to extend the Term for such additional periods as the Company may determine from time to time. 1 4. Compensation; Benefits; and Expenses. (a) Compensation. In addition to the items set forth below, the Employee's compensation for the services to be provided by him pursuant to this Agreement is set forth on the attached Exhibit "A." (b) Benefits. The Employee shall be entitled to participate in all insurance, vacation and other fringe benefit programs of the Company to the extent and on the same terms and conditions as are accorded to other management employees of the Company. Furthermore, the Employee shall receive a car leased by the Company, to the Employee's reasonable satisfaction. (c) Business Expenses. The Company will pay, or reimburse the Employee for, all ordinary and reasonable out-of-pocket business expenses incurred by the Employee in connection with his performance of services hereunder during the employment term in accordance with the Company's expense authorization and approval procedures then in effect upon presentation to the Company of an itemized account and written proof of such expenses. All expenses related to the operation of the Employee's car shall be covered by the Company. (d) Entire Compensation. The compensation provided for in this Agreement is in full payment of the services to be rendered by the Employee to the Company hereunder. 5. Insurance. The Company may, in its sole discretion and at its own expense, apply for and procure in its own name and for its own benefit or the benefit of the Employee key man life insurance on the life of the Employee in any amount or amounts considered advisable by the Company, and the Employee shall submit to any medical or other examination and execute and deliver such application or other instrument as may be reasonably necessary to effectuate such insurance. The Company shall also have the right to assume any insurance policies of the Employee in existence at the time employment hereunder commences. At such time as the Employee's employment is terminated, the Employee shall have the right to purchase from the Company any insurance policies at such policy's cash surrender value, owned in whole or in part by the Company on the life or health of the Employee. 2 6. Death or Total Disability of the Employee. (a) Death. In the event of the death of the Employee during the Term of this Agreement or any extension thereof, compensation payments shall continue in accordance with the provisions of paragraph 8 of this Agreement. (b) Total Disability. In the event of the Total Disability (as that term is hereinafter defined) of the Employee, the Company shall have the right to terminate the Employee's employment hereunder by giving the Employee thirty (30) days' written notice thereof. The foregoing notwithstanding, compensation payments shall continue in accordance with the provisions of paragraph 8 of this Agreement, provided that if the Employee, during any period of disability, including after termination of this Agreement, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by the Company, the amount of the Base Salary that the Employee would be entitled to receive from the Company shall be decreased by the amounts of such payments. The term "Total Disability," when used herein, shall mean a mental, emotional or physical condition which rendered the Employee for a period of six (6) consecutive months, during the Term of this Agreement, unable or incompetent to carry out, on a substantially full-time basis, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. The Employee agrees, in the event of any dispute as to the determination made pursuant to this paragraph, to submit to a physical or other examination by a licensed physician selected by the Company, the cost of which examination shall be paid by the Company. 7. Termination of Employment. In addition to termination pursuant to paragraph 6 above, the Company, following prior written notice to the Employee, may discharge the Employee and thereby terminate his employment hereunder for the following reasons: (a) ("for cause") (i) habitual intoxication; (ii) refusal to submit to treatment of an existing drug addiction; (iii) conviction of a felony; (iv) willful misconduct by the Employee in connection with the performance of his duties; (v) dishonesty, fraud or misappropriation of funds of the Company; (vi) insubordination or refusal to comply with a lawful directive of the Chief Executive Officer of the Company or his designee; or (vii) the Employee's breach of this Agreement in any manner or respect which is committed in bad faith and without reasonable belief that such action is in the best interest of the Company. 8. Payment Upon Termination. If the Employee dies during the Term, or if this Agreement is terminated by the Company for any reason other than the causes set forth in paragraph 7 hereof, the Company shall continue to pay the Employee's full compensation, including bonuses, for the balance of the Term. Such compensation shall be paid to the Employee, or his widow, or, if she is not then living, to the Employee's estate. If the Employee is terminated for any reason set forth in Section 7 hereof or if the Employee voluntarily terminates his employment, he shall receive no further compensation except such amounts as shall have accrued as of the date of termination. 3 9. Non-Disclosure. The Employee recognizes and acknowledges that he has and will have access to certain confidential information of the Company and that such information constitutes valuable, special and unique property of the Company. The Employee agrees that he will not, for any reason or purpose whatsoever, during or after the Term of his employment and any extension thereof, disclose any of such confidential information to any party without express authorization of the Company, except as necessary in the ordinary course of performing his duties hereunder. 10. Noncompetition. The Employee agrees that during the Term of this Agreement and any extension thereof, and for a period of two (2) years after the Company ceases to pay the Employee any compensation pursuant to the terms of this Agreement, the Employee shall not, unless acting pursuant hereto or with the prior written consent of the Board of Directors of the Company, directly or indirectly: (a) solicit business from or perform services for, any person, company or other entity which at any time during the Employee's employment by the Company was a client or customer of the Company if such business or services are of the same general character as those engaged in or performed by the Company. The foregoing notwithstanding, this restriction is not intended to stop the Employee from working for a competitor of the Company which has the same clients and customers as the Company, provided that the Employee does not interfere with the business relationship of the Company with such clients and customers; (b) solicit for employment or in any other fashion hire any of the employees of the Company; or (c) use the name of the Company or any name similar thereto, but nothing in this clause shall be deemed, by implication, to authorize or permit use of such name after expiration of the period covered by this paragraph. In the event that any provisions of this paragraph should ever be adjudicated to exceed the time, geographic, service or product limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, service or product limitations permitted to applicable law. 4 11. Equitable Relief; Survival. (a) The Employee acknowledges that the restrictions contained in paragraphs 9 and 10 hereof are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of any provisions of those paragraphs will result in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to temporary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence and action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdictions and Employee further irrevocably submits to the jurisdiction of any Pennsylvania court of Federal court sitting in the Eastern District of Pennsylvania over any suit, action or proceeding arising out of or relating to paragraphs 9 or 10. The Employee hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to such jurisdiction or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in any inconvenient forum. Effective service of process may be made upon the Employee by mail under the notice provisions contained in paragraph 14 hereof. (b) Survival of Covenants. The provisions of paragraphs 8, 9 and 10 shall survive the termination of this Agreement. 12. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as may be deemed expedient or necessary by the Company in its sole discretion. 5 13. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 14. Notices. All notices, request, demands, claims and other communications hereunder will be in writing. Any notices, requests, demands, claims or communications hereunder shall be deemed fully given if such are sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: 1740 Walton Road Blue Bell, PA 19422 with copy to: Joshua Gindin, Esquire 230 S. Broad St., 20th Floor Philadelphia, PA 19102 If to the Employee: 627 W. Wiltshire Drive Wallingford, PA 19086 Any party hereto may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, facsimile, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party hereto may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties hereto notice in the manner herein set forth. 6 15. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the Commonwealth of Pennsylvania. 16. Indemnification: The Company shall indemnify the Employee and hold him harmless for all acts or decisions made by him in good faith while performing services for the Company. The Company shall pay all expenses including attorney's fees, actually and necessarily incurred by the Employee in connection with the defense of any act, suit or proceeding and in connection with any related appeal including the cost of court settlements. 17. Contents of Contract; Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes and is instead of all other employment arrangement between the Employee and the Company. This Agreement cannot be changed, modified or terminated except upon written amendment duly executed by the parties hereto. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. The Company: Attest: NCO Financial Systems, Inc. ______________________[SEAL] BY:__________________________ Michael Barrist, President Witness: The Employee: - --------------------------- ----------------------------- Joseph C. McGowan 7 EXHIBIT "A" COMPENSATION A. Base Salary: The Employee shall be paid a base salary of One Hundred Twenty Five Thousand Dollars ($125,000) per year (the "Base Salary"), to be adjusted each year in accordance with the Consumer Price Index ("CPI") in effect for such year, payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. B. Bonus: The Employee shall, in addition to the Base Salary, receive an annual bonus as shall be determined by the Company's Board of Directors. C. Stock Option Plan: The Employee shall participate in such Stock Option Plan or Plans as shall be determined by the Company's Board of Directors. 8 EX-10 11 EXHIBIT 10.5 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of the _____ day of _____________ 1996, between NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation with its principal offices at 1740 Walton Road, Blue Bell, PA 19422 (the "Company") and STEVEN L. WINOKUR, an individual, residing at 203 Carpenter Lane, Ambler, PA 19002, (the "Employee"). In consideration of their mutual promises and covenants set forth herein, and intending to be legally bound hereby, the Company and the Employee agree as follows: 1. Employment. The Company hereby employs the Employee and the Employee accepts such employment on the terms and conditions hereinafter set forth. 2. Term. The term of this Agreement shall be for a period of five (5) years commencing on the date hereof (the "Term"). 3. Duties. The Employee is engaged hereunder to perform the duties of Vice President, Finance and Chief Financial Officer of the Company with his duties and services as may be reasonably required of him or assigned to him by the Company's Chief Executive Officer or Board of Directors. Employee shall, at all times be subject to the supervision of the President and Board of Directors of the Company. The Employee shall devote his full business time, attention, energies and best efforts to the performance of his duties hereunder and to the promotion of the business and interests of the Company and of any corporate subsidiaries or affiliated companies. 4. Compensation; Expenses. (a) Base Salary. The Employee shall be paid a salary at the rate of not less than One Hundred Fifty Thousand Dollars ($150,000) per year (the "Base Salary"). The Base Salary shall be paid in installments, in arrears, in accordance with the Company's regular payroll practices but not less often than monthly. (b) Bonus. The Employee shall receive such bonus or bonuses as the Board of Directors of the Company determine from time to time. 1 (c) Benefits. The Employee shall be entitled to participate in the Company's Stock Option Plan and all insurance, vacation and other benefit programs of the Company to the extent and on the same terms and conditions as are accorded to other executive employees of the Company. Furthermore, the Employee shall receive a car leased by the Company, to the Employee's reasonable satisfaction. (d) Business Expenses. The Company will pay, or reimburse the Employee for (i) all ordinary and reasonable out-of-pocket business expenses incurred by the Employee in connection with his performance of services hereunder, and (ii) all professional education classes and seminars and professional license fees, during the initial term and any extension thereof. The Employee shall follow the Company's expense authorization and approval procedures then in effect, including presentation to the Company of an itemized account and written proof of such expenses. All expenses related to the operation of the Employee's car shall be covered by the Company. (e) Entire Compensation. The compensation provided for in this Agreement is in full payment of the services to be rendered by the Employee to the Company hereunder. 5. Insurance. The Company may, in its sole discretion and at its own expense, apply for and procure in its own name and for its own benefit or the benefit of the Employee key man life insurance on the life of the Employee in any amount or amounts considered advisable by the Company, and the Employee shall submit to any medical or other examination and execute and deliver such application or other instrument as may be reasonably necessary to effectuate such insurance. The Company shall, subject to the Employee's prior written approval, also have the right to assume any insurance policies of the Employee in existence at the time employment hereunder commences. At such time as the Employee's employment is terminated, the Employee shall have the right to purchase from the Company any insurance policies at such policy's cash surrender value, owned in whole or in part by the Company on the life or health of the Employee. 6. Death or Total Disability of the Employee. (a) Death. In the event of the death of the Employee 2 during the Term of this Agreement or any extension thereof, compensation payments shall continue in accordance with the provisions of paragraph 8 of this Agreement. (b) Total Disability. In the event of the Total Disability (as that term is hereinafter defined) of the Employee, the Company shall have the right to terminate the Employee's employment hereunder by giving the Employee thirty (30) days' written notice thereof. The foregoing notwithstanding, compensation payments hereunder shall continue in accordance with the provisions of paragraph 8 of this Agreement, provided that if the Employee, during any period of disability, including after termination of this Agreement, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by the Company, the amount of the Base Salary that the Employee would be entitled to receive from the Company shall be decreased by the amounts of such payments. The term "Total Disability," when used herein, shall mean a mental, emotional or physical condition which rendered the Employee for a period of six (6) consecutive months, during the Term of this Agreement, unable or incompetent to carry out, on a substantially full-time basis, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. The Employee agrees, in the event of any dispute as to the determination made pursuant to this paragraph, to submit to a physical or other examination by a licensed physician selected by the Company, the cost of which examination shall be paid by the Company. 7. Termination of Employment. In addition to termination pursuant to paragraph 6 above, the Company, following prior written notice to the Employee, may discharge the Employee and thereby terminate his employment hereunder for the following reasons: (a) ("for cause") (i) habitual intoxication; (ii) refusal to submit to treatment of an existing drug addiction; (iii) conviction of a felony; (iv) willful misconduct by the Employee in connection with the performance of his duties; (v) dishonesty, fraud or misappropriation of funds of the Company; (vi) insubordination or refusal to comply with a lawful directive of the Chief Executive Officer of the Company or his designee; or (vii) the Employee's breach of this Agreement in any manner or respect which is committed in bad faith and without reasonable belief that such action is in the best interest of the Company. 8. Payment Upon Termination. If the Employee dies during the Term, or if this Agreement is terminated by the Company for any reason other than the causes set forth in paragraph 7 hereof, the Company shall continue to pay the Employee's full compensation, including bonuses, for the balance of the Term. Such compensation shall be paid to the Employee, or his widow, or, if she is not then living, to the Employee's estate. If the Employee is terminated for any reason set forth in Section 7 hereof or if the Employee voluntarily terminates his employment, he shall receive no further compensation except such amounts as shall have accrued as of the date of termination. 9. Non-Disclosure. The Employee recognizes and acknowledges that he will have access to certain confidential information of the Company and that such information constitutes valuable, special and 3 unique property of the Company. The Employee agrees that he will not, for any reason or purpose whatsoever, during or after the term of his employment, disclose any of such confidential information to any party without express authorization of the Company, except as necessary in the ordinary course of performing his duties hereunder. 10. Noncompetition. The Employee agrees that during the term of this Agreement and any extension thereof, and for a period of two (2) years after his employment ceases, the Employee shall not, unless acting pursuant hereto or with the prior written consent of the Board of Directors of the Company, directly or indirectly: (a) solicit business from or perform services for, any person, company or other entity which at any time during the Employee's employment by the Company is a client or customer of the Company if such business or services are of the same general character as those engaged in or performed by the Company; (b) solicit for employment or in any other fashion hire any of the employees of the Company; (c) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with any business or enterprise engaged in the business of debt collection or any other business engaged in by the Company or any of its affiliates in all those geographic areas in which the Company or any of its affiliates does business; (d) use or permit his name to be used in connection with any business or enterprise engaged in the business of debt collection or any other business engaged in by the Company or any of its affiliates in all those geographic area in which the Company or any of its affiliates does business; or (e) use the name of the Company or any name similar thereto, but nothing in this clause shall be deemed, by implication, to authorize or permit use of such name after expiration of the period covered by this paragraph. 4 In the event that any provisions of this paragraph should ever be adjudicated to exceed the time, geographic, service or product limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, service or product limitations permitted to applicable law. Furthermore, the above restrictions shall be waived by the Company in the event that the Employee is dismissed as a result of a merger or other business combination by the Company. The foregoing restrictions are not intended in any way to restrict the Employee's ability to resume his professional practice as a Certified Public Accountant after his employment by the Company ceases, provided, however, that he shall not provide services to any company in the debt collection business or other business in which the Company was engaged at the time employment ceases. 11. Equitable Relief; Survival. (a) The Employee acknowledges that the restrictions contained in paragraphs 9 and 10 hereof are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of any provisions of those paragraph will result in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to temporary and permanent injunctive relief, after proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence an action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdictions and Employee further irrevocably submits to the jurisdiction of any Pennsylvania court of Federal court sitting in the Eastern District of Pennsylvania over any suit, action or proceeding arising out of or relating to paragraphs 9 or 10. The Employee hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to such jurisdiction or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in any inconvenient forum. Effective service of process may be made upon 5 the Employee by mail under the notice provisions contained in paragraph 14 hereof. (b) Survival of Covenants. The provisions of paragraphs 8, 9 and 10 shall survive the termination of this Agreement. 12. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as may be deemed expedient or necessary by the Company in its sole discretion. 13. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 14. Notices. All notices, request, demands, claims and other communications hereunder will be in writing. Any notices, requests, demands, claims or communications hereunder shall be deemed fully given if such are sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: 1740 Walton Road Blue Bell, PA 19422 with copy to: Joshua Gindin, Esquire 230 S. Broad St., 20th Floor Philadelphia, PA 19102 6 If to the Employee: 203 Carpenter Lane Ambler, PA 19002 with copy to: Sarah Ford, Esquire Ford Narducci & Roeberg 583 Skippack Pike, Ste 200 Blue Bell, PA 19422 Any party hereto may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party hereto may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties hereto notice in the manner herein set forth. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the Commonwealth of Pennsylvania. 16. Indemnification: The Company shall indemnify the Employee and hold him harmless for all acts or decisions made by him in good faith while performing services for the Company. the Company shall pay all expenses including attorney's fees, actually and necessarily incurred by the Employee in connection with the defense of any act, suit or proceeding and in connection with any related appeal including the cost of court settlements. 17. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the rules of the American Arbitration Association. Venue shall be in Montgomery County, Pennsylvania. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party shall bear its costs of arbitration, including attorney's fees, expert fees and costs. 7 18. Contents of Agreement; Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes and is instead of all other employment arrangement between the Employee and the Company. This agreement cannot be changed, modified or terminated except upon written amendment duly executed by the parties hereto. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. Attest: NCO Financial Systems, Inc. ______________________[SEAL] BY:__________________________ Michael Barrist, President Witness: The Employee: --------------------------- ----------------------------- Steven L. Winokur 8 EX-10 12 EXHIBIT 10.8 LEASE AGREEMENT THE UNILAND PARTNERSHIP, L.P. AND MANAGEMENT ADJUSTMENT BUREAU, INC. Date: ____________ Lease No. 2235-F - -------------------------------------------------------------------------------- Paragraph Item Page 1 Leased Premises .......................................... 1 2 Term ..................................................... 1 3 Rent ..................................................... 1 4 Construction of Premises ................................. 2 5 Delays in Construction ................................... 2 6 Possession ............................................... 3 7 Early Entry .............................................. 4 8 Use ...................................................... 4 9 Subletting ............................................... 5 10 Maintenance .............................................. 6 11 Utilities ................................................ 8 12 Additional Rent .......................................... 8 13 Insurance ................................................11 14 Indemnity ................................................12 15 Compliance With Laws .....................................13 16 Landlord's Access ........................................13 17 Condemnation .............................................14 18 Improvements .............................................15 19 Destruction ..............................................15 20 Continuous Occupancy .....................................16 21 Right to Perform .........................................16 22 Tenant Default and Right of Reentry ......................17 23 Landlord's Notice ........................................19 24 Access Road ..............................................19 25 Subordination ............................................19 26 Method of Notice .........................................20 27 Attorneys Expenses .......................................21 28 Telephone Service ........................................21 29 Jury Waiver ..............................................21 30 Invalidity ...............................................21 31 Advanced Rent ............................................21 32 Succession ...............................................22 33 Rules and Regulations ....................................22 34 Quiet Enjoyment ..........................................22 35 Financing Cooperation ....................................22 36 Financial Statement ......................................22 37 Arbitration ..............................................22 38 Signature ................................................23 39 Parking ..................................................23 40 Jurisdiction .............................................23 41 No Recording .............................................24 42 Paragraph Captions .......................................24 LEASE AGREEMENT THIS LEASE AGREEMENT, made this _____ day of _______________ , 1994 by and between THE UNILAND PARTNERSHIP, L.P., a New York Limited Partnership, University Corporate Centre, 100 Corporate Parkway, Suite 500, Amherst, New York 14226, hereinafter called "Landlord," and MANAGEMENT ADJUSTMENT BUREAU, INC., a New York Corporation, 120 Pineview Drive, Amherst, New York 14228, hereinafter called "Tenant." FIRST: LEASED PREMISES. Landlord leases to Tenant and Tenant hereby takes office space comprising approximately TWENTY FIVE THOUSAND SIX HUNDRED SIXTY SEVEN (25,667) square feet ("Leased Premises") that being the entire Building located at the Dodge Home Centre, Dodge" "and Sweet Home Road, Amherst, New York, and more specifically designated on a plan attached hereto and designated as Schedule "A" and made a part hereof. SECOND: TERM. The term hereof shall commence on the first day of the month following Tenant's acceptance of the Leased Premises pursuant to paragraph "SIXTH" herein, and continue for a period of FIFTEEN (15) years. THIRD: RENT. a) The total base rent shall be FOUR MILLION ONE HUNDRED SIXTY TWO THOUSAND ONE HUNDRED FIFTY and 00/100 ($4,162,150.00) DOLLARS, payable as follows: b) on or before the signing of the Lease as the first months rent the sum of TWENTY ONE THOUSAND FIVE HUNDRED THIRTY FOUR and 58/100 ($21,534.58) DOLLARS and on the first day of the second month of the tenancy and on the first day of each and every calendar month thereafter through the sixtieth month of the -1- tenancy, Tenant shall pay to landlord the sum of TWENTY ONE THOUSAND FIVE-HUNDRED THIRTY FOUR and 58/100 ($21,534.58) DOLLARS. C) On the first day of the sixty-first through one hundred twentieth month of the tenancy, Tenant shall pay to Landlord the sum of TWENTY THREE THOUSAND TWO HUNDRED SIXTY SEVEN and 08/100 ($23,267.08) DOLLARS. d) on the first day of the one hundred twenty first through one hundred eightieth month of the tenancy, Tenant shall pay to Landlord the sum of TWENTY FOUR THOUSAND FIVE HUNDRED SIXTY SEVEN and 50/100 ($24,567.50) DOLLARS. e) All rents shall be paid to Landlord or authorized agent at University Corporate Centre, 100 Corporate Parkway, Suite 500, Amherst, New York 14226, or at such other places as may be designated by Landlord from time to time. All rents payable in United States funds. FOURTH: CONSTRUCTION OF LEASED PREMISES. Landlord within thirty (30) days of the execution of this Lease, shall file all necessary documentation and drawings with the Town of Amherst in order to commence the Town of Amherst approval process required for the construction of the Leased Premises. Landlord, within one hundred twenty (120) days after the receipt of all necessary Town of Amherst approvals, shall cause the Leased Premises to be built and completed pursuant to Schedule "B" attached hereto and made a part hereof. The Leased Premises shall be constructed in a good and workmanlike manner. Landlord warrants that the improvements to the Leased Premises will be constructed with new materials of good quality and in accordance with all the currently existing laws, ordinances and statutes of the municipal or State governments. FIFTH: DELAYS IN CONSTRUCTION. In the event that all Schedule "B" improvements have not been completed within one hundred twenty (120) days after the receipt by Landlord of all necessary Town of Amherst approvals Tenant shall have the right but not the obligation to enter into possession of such portions as may -2- be ready for occupancy and Landlord shall diligently proceed so as to place the Leased Premises in conformance with Schedule "B" within one hundred eighty (180) days after the receipt by Landlord of all necessary Town of Amherst approvals. During such period of partial occupancy, the rent to be paid hereunder shall be apportioned as to include only that floor space actually occupied by Tenant. For the purposes of apportionment of rent under this Paragraph and Paragraph "SEVENTH" only, it is agreed that the space shall be annually let for TEN and 06/100 ($10.06) DOLLARS per square foot. No entering into possession by Tenant of any portion of the Leased Premises under the provisions of this paragraph shall constitute waiver of Landlord's obligation to complete unfinished items of construction or to correct defective work so as to bring the improvements in accordance with Schedule "B". If Landlord is unable to deliver possession of total Leased Premises within two hundred forty (240) days after the receipt by Landlord of all necessary Town of Amherst approvals, either party may terminate this Lease without any claim for damages and all advanced rents and security deposits shall be refunded by Landlord to Tenant. SIXTH: POSSESSION. The entire Leased Premises shall be considered ready for possession and Tenant shall accept the entire Leased Premises when: (A) The Leased Premises has been substantially completed in accordance with Schedule "B"; and (B) Ten (10) days' notice has been provided to Tenant that the Leased Premises will be ready for occupancy by Tenant. (C) When the above conditions are deemed satisfied, Tenant shall execute and deliver to Landlord within five (5) days of delivery of the Leased Premises the acknowledgement of possession statement, attached to Lease and delineated as Schedule "C" and made a part hereof. -3- SEVENTH: EARLY ENTRY. Tenant shall accept Leased Premises whenever deemed ready for possession, as described in paragraph "SIXTH" herein, and shall pay prorated rent for said early occupancy based on an annual rental of TEN and 06/100 ($10.06) DOLLARS per square foot until the commencement of the Lease Term. Landlord shall allow Tenant early entrance on the Leased Premises to prepare Leased Premises for the installation of Tenant's fixtures and equipment. Tenant shall obtain prior written consent of Landlord, which consent shall not be unreasonably withheld, and Tenant shall obey all reasonable restrictions of Landlord and shall prepare Leased Premises in a manner so as not to interfere with Landlord's construction of Leased Premises. Upon Tenant's early entry onto the Leased Premises, all terms and conditions of this Lease shall apply as if the Lease Term had commenced except as otherwise stated herein. EIGHTH: USE. The Leased Premises shall be used and occupied by Tenant as office space and for no other purpose. Tenant shall not cause excess odor, vibration, fumes, noise and/or nuisance within or beyond the confines of the Leased Premises and its use shall not result in the deterioration of the Leased Premises or the Building in which the Leased Premises is located. In addition, Tenant warrants and represents the following: a. Tenant shall place waste and refuse matter in the receptacle provided by Tenant. Tenant shall deposit only acceptable commercial waste in the aforesaid receptacle. Said acceptable commercial waste shall not include; Hazardous waste; Pathological waste; Industrial waste; Asbestos waste; Tires; Batteries; Oil and any wastes packed in drums or drums themselves; and any other wastes deemed unacceptable on any future date by any appropriate governmental authority or Landlord's waste hauler. 1. Tenant shall indemnify and hold Landlord harmless from all costs and expense, including but not limited to, reasonable attorneys fees, charges, fines and penalties for Tenants deposit of any unacceptable waste in the waste receptacle. -4- b. Tenant shall, at all times hereunder, comply with all applicable Federal, State and local environmental, land use, zoning, health, safety and sanitation laws, ordinances, codes, rules and regulations and interpretations and orders of regulatory and administrative authorities with respect thereto, and shall obtain and comply with any and all approvals, registrations or permits required thereunder. Without limiting the generality of the foregoing, Tenant shall duly comply with all requirements the New York State Environmental Conservation Law and the regulations promulgated thereunder. Tenant at Landlord's direction shall promptly undertake and diligently pursue to completion the appropriate and legally authorized remedial and clean-up action in the event any release by Tenant of oil or Hazardous waste or substances, upon or into the Leased Premises, the Building in which the Leased Premises is located, or the surrounding land area. 1. Tenant shall provide Landlord with copies of any notification of releases of oil or Hazardous wastes or substances which are given by, or on behalf of the Tenant to any Federal, State or local agencies or authorities with respect to the Leased Premises. 2. Tenant shall defend, indemnify, and hold harmless the Landlord, its employees, agents, officers and directors from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs or expenses in relation to the release of any oil or Hazardous wastes or substances upon the Leased Premises, and by Tenant, in the Building in which the Leased Premises is located, or the surrounding land area. 3. Tenant shall furnish to Landlord at Landlord's written request, written certification of its compliance with this Paragraph "EIGHTH". Such certification shall list all hazardous wastes or substances and the quantities thereof used on the Leased Premises for the past year. NINTH: SUBLETTING. Provided Tenant remains financially and legally responsible for all the terms and conditions of this -5- Lease, Tenant may sublet the Leased Premises or assign the Lease with Landlord's prior written consent which consent shall not be unreasonably withheld. Notwithstanding the above, prior to Tenant offering Leased Premises for sublease, Tenant shall give Landlord written notice of its desire to sublet the Lease Premises. Landlord shall have thirty (30) days from the receipt of said notice to notify Tenant of its desire to terminate the Lease and take possession of the Leased Premises as of the date the sublease would have commenced, but in no event later than ninety (90) days from the date of Tenant's notice to Landlord. TENTH: MAINTENANCE. Subject to Paragraph "TWELFTH" responsibility of the respective parties for maintenance and repairs to the Leased Premises shall be determined as follows: A) Landlord shall, except for Tenant's negligence, replace the structural portion of the Leased Premises and the Building including; the roof structure, exterior walls (excluding window glass, painting and sealing), foundation, floor slab (excluding floor finishing such as tile, carpeting and the like). Same shall be done at Landlord's sole cost and expense except if damage to the structure was caused by Tenant's negligence, in which case, Tenant shall be responsible for the cost. Landlord shall be responsible for structural maintenance, however, this shall be done at Tenant's sole cost and expense. B) Landlord throughout the term of the Lease and any renewal thereof shall maintain and repair the exterior portions of the Leased Premises and the Building, including but not limited to, the roof repairs, caulking, painting and sealing of window glass, walls and floors. C) Landlord shall throughout the term of the Lease and any renewal thereof maintain the exterior grounds of the Building and Leased Premises including but not limited to landscape and shrubbery maintenance and replacement when necessary; lawn care including lawn spraying and service and replanting when necessary; maintaining including sealing, patching, resurfacing and snow -6- plowing removal when necessary of the pedestrian walks, parking lots, driveways and access roads. D) Landlord shall throughout the term of the Lease and any renewal thereof, maintain the Complex Areas of the Leased Premises, including but not limited to the external lighting, storm and sanitary sewer and water lines, curbing, sealing, patching, resurfacing, and snow removal of the pedestrian walkways, parking lots, driveways and access roads; landscape and shrubbery maintenance and replacement when necessary; lawn care including lawn spraying and service, and replanting when necessary. E) Landlord shall maintain all electrical systems to the Building. Landlord shall be responsible for the maintenance of electrical systems up to the Leased Premises. Tenant is responsible for the maintenance of electrical systems from the exterior perimeter wall to all areas throughout the Leased Premises. Tenant shall be responsible for the replacement of all incandescent and fluorescent light bulbs which are located within the Leased Premises on an as needed basis. F) Tenant shall, throughout the term of the Lease and any renewal thereof, maintain, repair, and replace when necessary, all mechanical and electrical systems operating in the Leased Premises. Such maintenance, repair, and replacement shall include but not be limited to routine, scheduled, and periodic maintenance and cleaning and the recommended replacement of all filters. G) Tenant shall, throughout the term of the Lease or any renewal thereof, maintain and repair the interior portions of the Leased Premises, including, but not limited to, interior walls and wall finishings; carpeting and other floor finishings; ceiling, tile; lavatories and fixtures therein, and the like, and shall surrender same in as good a condition as received, normal wear and tear excepted. H) Tenant shall throughout the term of the Lease and any renewal thereof continue to operate, so far as in its power, utility services to the Leased Premises (heat, electricity -7- and the like) in sufficient amount to prevent damage to the Leased Premises or deterioration thereof. I) All maintenance, repairs, and alterations required by Tenant or Landlord under this Lease shall be done immediately as needed and in a good and workmanlike manner. Each Party shall comply with federal, state, and local governments' laws, rules, orders and ordinances, and regulations at any time issued or enforced applicable to the Leased Premises. Tenant shall not make any structural alteration to the Leased Premises without prior written consent of Landlord, which consent shall not be unreasonably withheld. ELEVENTH: UTILITIES. Tenant agrees that it shall be responsible for the payment of all utilities, including water, gas, electricity, heat or other services delivered to the Leased Premises; Landlord shall provide separate metering for all services, which Landlord shall bill Tenant for on a prorated basis. Landlord shall not be responsible for failure of, or lack of, water, gas, electricity, or other fuel, except for Landlord's negligence or Landlord's failure to perform the covenants of this Lease on its part to be performed. TWELFTH: ADDITIONAL RENT. A. General Provisions. As additional rent hereunder, Tenant shall pay to Landlord its proportionate share of the following, defined as follows: (1) As to those items which effect the Leased Premises only, (Landlord's cost of all items referenced in Paragraph "10" (B-D) herein) Tenant's proportionate share shall be one hundred (100%) percent. (2) As to those items which effect multiple structures of Landlord including the Building, Tenant's floor space in relation to the floor space for all the affected buildings shall -8- be the factor in determining Tenant's proportionate share of these so-called "Complex Area" charges. B. INSURANCE. (1) Landlord's cost of Fire and Extended Coverage Insurance premiums and Landlord's Public Liability Insurance premiums. Landlord shall, at the request of the Tenant, provide an explanation of any premium increase hereunder. C. TAXES. (1) Landlord's cost of all state, municipal and local taxes (except gift, estate, inheritance, succession, and income taxes, if any, on the interest of the Landlord) assessments, levies and other charges general and special ordinary and extraordinary, in whatever name, nature and kind, (except as specified above) that are or may be during the term hereof, or any renewal, (beginning with the commencement of the term hereof) levied, assessed, imposed or charged on the Leased Premises and all of which may be levied, assessed, imposed, or charged on or against the leasehold estate hereby created during the term hereof. The taxes, assessments, levies and other charges, shall be paid in the name of the Landlord, and Landlord shall pay the same as specified above whether such taxes or charges become due and payable during the term hereof or any renewal, or subsequent to the expiration or sooner termination hereof; however, Tenant shall be liable for taxes pro-rated only until the date of termination of this Lease. If, at any time during the term of this Lease, the present method of taxation or assessment shall be changed so that the whole or any part of the taxes, assessments, levies or charges now levied, assessed and imposed on the real estate hereby demised and improvements thereon, shall be transferred to the rentals received from such real property in whole or in part, or against such rentals in whole or in part, and if partly on such real estate and partly on such rentals, Tenant shall pay such proportionate share of taxes and assessments, levied and assessed on such rentals as shall proportionately relieve the taxes and assessments on such real estate, it being the intention of the parties hereto that -9- Landlord shall receive the rents reserved herein without deduction of taxes (except gift, estate, inheritance, succession, and income taxes on the interest of the Landlord), assessments, levies, or charges in respect to the real estate and improvements and also on such rentals. Tenant shall have the right, at its own expense, to contest any taxes or assessments in the name of Landlord and Landlord shall cooperate in any proceedings arising out of Tenant's exercise of this right. D. MAINTENANCE. (1) The Landlord's maintenance responsibilities referenced in Paragraph "TENTH" subparagraphs B through E herein. E. BUILDING AND COMPLEX AREAS. (1) Landlord's cost of maintaining and repairing all structural portions within the Building as provided in Paragraph "10" (a) herein. (2) Utility expense for electrical service to the external portions of the Building and Complex areas for external lighting, deep-dock pumps and other exterior use; water and sprinkler service expense of the Building. (3) All items of maintenance required of Landlord under this Lease for the Complex areas as provided in Paragraph "10" (D) herein. F. BILLING. (1) The amounts required to be paid by the Tenant to the Landlord, under this Paragraph "TWELFTH" hereof, may at the option of the Landlord, be estimated for a full Lease year and billed monthly in advance at the rate of one-twelfth (1/12th) of such estimate. The Landlord shall make an adjustment based upon actual costs within ninety (90) days of the end of each Lease year. Any monies due and owing to landlord following the end of the Lease year reconciliation shall be paid by Tenant to Landlord within thirty (30) days of the date of billing any such monies due and owing Tenant following the end of the Lease year reconciliation shall be credit by landlord against the next future installments of additional rent owed by Tenant to Landlord. -10- (2) All additional rent due and owing under this Paragraph "TWELFTH" shall be paid by Tenant to Landlord within twenty (20) days following the date of the billing by Landlord for same. Landlord shall bill Tenant monthly for additional rent expenses. F. DISPUTE RESOLUTION. (1) In the event that Tenant disputes any additional rent billed, Tenant must nonetheless pay same to Landlord within the time provided herein or be in default of the Lease. The propriety of such billing shall not be a defense to any action taken by Landlord for Tenant's failure to pay any additional rent as provided herein. In the event Tenant disputes any additional rent billed and timely paid by Tenant, Landlord shall in good faith diligently review the disputed item with Tenant within forty five (45) days of written notification by Tenant of the specific dispute. If the parties cannot come to an agreement, the dispute shall be resolved as provided for in this Lease. In the event Tenant then is owed a credit for additional rent, Landlord shall credit same against: First: Any additional rent due and owing by tenant; Second: Base rent due and owing by Tenant. Said Tenant's credit shall be issued by Landlord at the next rental billing period following such determination. Tenant waives its right to dispute or challenge any additional rent, billing or charge rendered longer than thirteen (13) months prior to Tenant's notification of Landlord of the specific dispute as provided herein. THIRTEENTH: INSURANCE. Tenant, at its expense, shall maintain the following: LIABILITY: TWO MILLION DOLLAR ($2,000,000.00) combined single limit of comprehensive general liability coverage which coverage may be provided under Tenant's excess or umbrella liability policy. CONTENTS: Tenant shall carry fire and extended coverage insurance adequate to insure its improvements, betterments -11- and contents. Tenant shall provide Landlord with a certificate of insurance providing proof of such insurance. This certificate shall provide for a ten (10) day written notice to Landlord in the event of cancellation or material change of coverage. This insurance may be provided as part of the blanket coverage by Tenant. Tenant shall provide Landlord with a certificate of insurance showing Landlord as additional insured. The certificate shall provide for a ten (10) day written notice to Landlord in the event of cancellation or material change of coverage. This insurance may be provided as part of blanket coverage by Tenant. FOURTEENTH: INDEMNIFICATION. Landlord shall not be liable for and Tenant agrees to indemnify, defend, and forever hold harmless Landlord, its agents, servants, and employees from and against claims, damages, costs (including but not limited to court costs and attorneys fees) resulting from, injury or damage to Tenant, its agents, servants, or employees or any other person(s) claiming through Tenant, unless such liabilities shall result solely from an act or omission of the Landlord, its agents, servants, or employees. Landlord and Tenant hereby release one another from all liability for any loss or damage to real property. This release is conditioned upon the inclusion in the respective policies of insurance an endorsement or provision stating that such release will not adversely affect said policies or prejudice any right of the insured to recover thereunder. Landlord and Tenant agree that their respective insurance policies will include the aforesaid provision or endorsement so long as the same is obtainable without extra cost, or if extra costs should be charged, so long as the party for whose benefit the clause is obtained shall pay for such extra costs. If extra costs shall be chargeable therefor, the party so affected shall advise the other of the amount of extra costs and the other party, at its election, may pay the same or decline to so pay, in which event the release from liability given to said party by this section shall be deemed to be withdrawn. -12- FIFTEENTH: COMPLIANCE WITH LAWS. From and after entering into possession, subject to Landlord's duties and obligations to repair as contained in Paragraph "TENTH," Tenant shall comply with all statutes, ordinances, and requirements of all municipal, state, and federal authorities now in force, or which may hereafter be in force, pertaining to the Leased Premises, occasioned by the use of the Leased Premises by Tenant. The notice of a violation by Landlord or any governmental or quasi-governmental agency to Tenant or the commencement or pendency of any municipal, state, or Federal proceeding alleging a violation which would affect the use of the Leased Premises shall, at the option of the Landlord, and subject to the notice provisions of Paragraph "TWENTY-SECOND" be deemed a breach hereof, providing, however, the notice of such violation or the commencement of such proceedings shall not be a breach hereof, if: A) Tenant immediately takes action to comply with such statute, ordinance or other requirements, or Tenant, in good faith, contests such proceeding to a final determination and thereafter complies with such order as may issue. (In any such contest, Tenant will take such action(s), including deposit of security, as may be reasonably necessary to prevent a forfeiture of Landlord's title.) Notwithstanding this Paragraph "FIFTEENTH," if after Tenant has been found to be in violation of any statute, ordinance, or requirement of any municipal, state or federal authority now in force, or hereinafter in force, pertaining to Tenant's use of the Leased Premises, and Tenant fails to immediately correct the same, Landlord shall have the right to take whatever action necessary to place Leased Premises in compliance with any statute, ordinance, and requirement of all municipal, state, and federal authorities now in force or which hereinafter may be in force and to charge Tenant the costs thereof as additional rent for this action. SIXTEENTH: LANDLORD'S ACCESS. Tenant shall permit Landlord, or Landlord's agent, at reasonable times and upon -13- reasonable notice, to enter upon the Leased Premises for the purpose of inspecting the same and will permit Landlord, at any time within one hundred twenty (120) days prior to the expiration of Lease, to place upon the Leased Premises any usual "To Let" or "For Lease" signs and at reasonable times and upon reasonable notice permit persons desiring to lease the same to inspect the Leased Premises thereafter. Landlord shall, at the time permitted by this Lease, have the right to enter Leased Premises for the purpose of making repairs or structural changes to said Leased Premises or Building commonly known as Building located at the Sweet Home Centre, Dodge and Sweet Home Roads, Amherst, New York. Any such repairs or structural changes will be made with reasonable dispatch and in a manner to interfere as little as possible with Tenant's use and enjoyment of the Leased Premises. SEVENTEENTH: CONDEMNATION. (A) In the event that an area of twent-five percent (25%) or more of the Leased Premises and which materially affects Tenant's ability to conduct its intended business shall be taken, or access to the Leased Premises shall be taken in any proceeding by the public authorities, by condemnation or by deed in or be acquired for public or quasi-public purposes, the Tenant shall have the option of terminating this Lease, in which case any unearned rent shall be refunded to the Tenant. The said option to terminate shall be exercisable by written notice given by the Tenant to the Landlord not later than sixty (60) days following notice to the Tenant by Landlord of such condemnation of acquisition. In the event that less than twenty-five percent (25%) of the area of the Leased Premises or more, providing same does not materially affect Tenant's ability to conduct its intended business or if Tenant does not elect to terminate this Lease, then the Landlord shall restore the Leased Premises to the end that the Leased Premises shall be restored so far as practicable to the condition existing immediately prior to such taking, and the rent and additional rent shall be reduced in the same proportion that -14- the amount of floor area in the Building is reduced by such condemnation or other proceedings, or by such acquisition. (B) In the event of a condemnation of more than eighty percent (80%) of the Building in which the Leased Premises or eighty (80%) percent of the building, or in the event of any termination of this Lease by virtue of condemnation as provided in Paragraph (A) of this Paragraph "SEVENTEENTH" this Lease shall terminate and the Tenant shall not be entitled to any part of the award or awards made, provided, however, that Tenant may make a claim for loss of Tenant's fixtures, loss of business and relocation expenses. (C) Anything contained in Subparagraphs (A) and (B) of this Paragraph "SEVENTEENTH" to the contrary notwithstanding, the Landlord shall not be required to repair or rebuild the Leased Premises during the last year of the original term or the last year of any renewal term thereof. EIGHTEENTH: IMPROVEMENTS. Title to any and all improvements by Tenant made to the Leased Premises during the term hereof shall vest in Landlord, as of the end of the term of this Lease or any earlier termination. Tenant may, upon termination hereof, remove all its trade fixtures but shall repair or pay for repairs necessary for damages to the Leased Premises occasioned by removal. NINETEENTH: DESTRUCTION. In the event of a partial destruction of the Leased Premises, from any cause, the tenancy shall continue with rent proportionately abated. Landlord shall forthwith repair the same, provided that such repairs can be made within ninety (90) days from the partial destruction of Leased Premises under existing governmental laws and regulation, but such partial destruction shall not terminate this Lease. Tenant shall be entitled to a proportionate reduction of rent while such repairs are being made. If such repairs cannot be made within said ninety (90) days, Landlord shall, within twenty (20) of the partial -15- destruction notify Tenant that repairs cannot be completed within ninety (90) days, and within five (5) days after such notification, Tenant shall, at its option, notify Landlord of its intent to remain upon Leased Premises or cancel this Lease, and if Tenant remains, Landlord shall have one hundred fifty (150) days from that date to complete repair, rent to be proportionately reduced as aforesaid. Repairs which cannot be completed within one hundred fifty (150) days, shall be done only with the election of both Landlord and Tenant. If such partial damage is due to the fault or negligence of Tenant, Tenant's servants, employees, agents, visitors or licensees, the damages shall be repaired by Landlord, but there will be no apportionment of rent. In the event that the Building is destroyed to an extent more than one half (1/2) of the replacement costs thereof, either Landlord or Tenant may terminate this Lease. Notwithstanding the above, Landlord shall have no obligation to repair Leased Premises at any time within the last year of the Lease or the last year of any extension or renewal thereof. TWENTIETH: CONTINUOUS OCCUPANCY: Tenant shall with thirty (30) days written notice to Landlord, be able to vacate but not abandon the Leased Premises at any time during the term hereof. In the event that a receiver shall be appointed to take over the business of Tenant, or in the event that Tenant shall make a general assignment for the benefit of creditors, or Tenant shall take or suffer any action under any insolvency or bankruptcy act, provided in the case of an involuntary bankruptcy, such action shall not be vacated within sixty (60) consecutive days and from the filing of such an insolvency or bankruptcy action, the same shall constitute a breach of this Lease by Tenant. TWENTY-FIRST: RIGHT TO PERFORM. If a notice of any lien be filed against the Leased Premises for, or purporting to be for, labor or material alleged to have been furnished, or to be furnished to, or for any party hereto, at the Leased Premises or -16- for utilities or other services provided to the Leased Premises on behalf of Tenant, and if such party shall fail to take such action as shall cause such lien to be removed from the record by discharge, deposit or bonding proceedings, within fifteen (15) days after such party received notice of the filing of such lien, any other party may pay the amount of such lien or discharge the same by deposit or by bonding proceedings, and in the event of such deposit or bondings proceedings, such other party may require the lienor to prosecute an appropriate action to enforce the lienor's claim. (In such case, any party may pay any judgment recovered on such claim.) Any amount paid or expense incurred by Landlord or Tenant pursuant to this Paragraph "TWENTY- FIRST" be added to, or deducted from, succeeding rental payments as may be appropriate. TWENTY-SECOND: TENANT DEFAULT AND RIGHT OF REENTRY. In the event of any breach of this Lease by Tenant, Landlord, besides other rights and remedies it may have, shall have the immediate right of reentry and may remove all persons and property from the Leased Premises. Such property may be moved and stored in a public warehouse or elsewhere at the cost of, and for the account of, Tenant. Should Landlord elect to reenter, or should it take possession pursuant to legal proceedings or any notice provided by law, it may either terminate this Lease or may, from time to time, without terminating this Lease, relet said Leased Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such terms and conditions as Landlord, in its sole discretion, may deem advisable, with the right to alter or repair Leased Premises upon such reletting. In the event of such reletting without termination, Tenant shall be immediately liable to pay to Landlord, in addition to any other amounts then due hereunder at the option of Landlord, either: (A) the cost and expense of such reletting and such alterations and/or repairs and any amount which the rent reserved herein for the period of such reletting, but not beyond the term -17- hereof, exceeds the amount agreed to be paid as rent for such period, or; (B) rents received by Landlord from such reletting shall be applied first to the repayment of indebtedness other than rent due hereunder, second to cost and expenses of reletting and alterations or repairs, and third to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable. Tenant shall be credited only with rent actually received by Landlord. Tenant shall, in such event, pay any deficiency between the amount due from Tenant to Landlord and the amount credited. No such reentry or taking possession by Landlord shall be construed as an election to terminate this Lease unless written notice of such intention is given, or unless termination be declared by a Court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may, at any time thereafter, elect to terminate this Lease on account of such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedy it may have, it may recover from Tenant all damages it may incur by reason of such breach, and including the worth at the time of such termination of the excess, if any, of the amount of said rent and charges equivalent to the rent reserved for over the then reasonable value of the Leased Premises for the remainder of the term. Notwithstanding this Paragraph "TWENTY-SECOND," and as a condition precedent to the exercise of any remedy under this Lease by Landlord: (C) Landlord shall give Tenant notice in writing of Tenant's failure to pay rent and/or real estate taxes and other, if any, obligations satisfied by payment of money, and if Tenant shall pay the same within ten (10) days of receipt of said notice, Tenant shall not be in default or breach of this Lease; (D) Landlord shall give Tenant notice in writing of any other default or breach which cannot be corrected by the payment of money, and if Tenant shall correct the same within ten -18- (10) days of receipt of said notice, Tenant shall not be in default or breach hereunder provided, however, if the breach or default is such that it may not be corrected within said ten (10) day period, but Tenant commences to correct the same within said period and diligently continues to correct same, Tenant shall not be in default or breach hereof. TWENTY-THIRD: LANDLORD'S NOTICE. In any breach of the Lease by Landlord, Tenant shall be bound by the same notice requirements as the Landlord in Paragraph "TWENTY-SECOND." TWENTY-FOURTH: ACCESS ROAD. Landlord grants to Tenant the right of non-exclusive ingress and egress along the private road delineated as Area "C" in Schedule "A." Such road shall be for the use and enjoyment of ingress and egress and installation of utilities and services by owners, lawful occupants and tenants of Landlord, and Tenant shall not obstruct such access road. Landlord grants to Tenant the right of non-exclusive ingress and egress through Area "B" (parking areas) delineated in Schedule "A." The right of nonexclusive ingress and egress shall be for the use and enjoyment for ingress and egress and installation of utilities and services by owners, lawful occupants and tenants of Landlord, and Landlord shall not obstruct such Area "B". Providing Tenant is not in default of the terms and conditions of this Lease, and a mortgagee shall foreclose on any mortgage affecting the Leased Premises, access road, or any premises enjoying the use of said road, the use and enjoyment by Tenant by the right of way for ingress and egress shall not be disturbed by said action to foreclose said mortgage. Tenant shall execute any document required by Landlord to enforce the terms and conditions of this paragraph provided said does not diminish Tenant's rights hereunder. TWENTY-FIFTH: SUBORDINATION. This Lease shall be subject and subordinate at all times to the lien of the mortgages -19- or any Lease covering the Leased Premises, given in connection with an Industrial Revenue Bond financing now on the Leased Premises, and all advances made or thereafter to be made upon the security thereof; subject and subordinate to the lien of any future mortgage or mortgages including purchase money mortgages, or future Lease or Leases given as part of an Industrial Revenue Bond financing which may be a lien upon the Leased Premises, provided, however, that any such mortgage or mortgages, or such Lease or Leases, shall provide that in any foreclosure proceeding, Tenant will not be made a party thereunder and in any sale in such foreclosure proceeding, this Lease shall remain undisturbed and in full force and effect provided Tenant is not in default thereunder. TWENTY-SIXTH: METHOD OF NOTICE. Any notice or demand which, under the terms of this Lease or under any statute, must or may be given or made by the parties hereto shall be in writing and shall be given or made by mailing the same by certified or registered mail addressed to the respective parties at the following addresses: In the case of Tenant, to: With a copy to: MANAGEMENT ADJUSTMENT _____________________________ BUREAU, INC. _____________________________ 120 Pineview Drive _____________________________ Amherst, New York 14228 _____________________________ In .the case of Landlord, to: With a copy to: UNILAND DEVELOPMENT COMPANY Parrino, Cooper, Butler & Dobson 100 Corporate Parkway 135 Delaware Avenue, Suite 405 Suite 500 Buffalo, New York 14202 Amherst, New York 14226 ATTN: Arthur F. Dobson, Jr. ATTN: DIRECTOR OF PROPERTIES _____________________________ or such other address as each of the parties hereto may from time to time designate by notice to the other. -20- TWENTY-SEVENTH: ATTORNEY EXPENSES. If either party shall at any time be in default hereunder and if either party shall institute an action or summary proceeding against the offending party based upon such default, then the losing party will reimburse the prevailing party for the expense of attorney's fees and disbursements thereby incurred by the prevailing party, so far as the same are reasonable in amount. Also, so long as Tenant shall be a tenant hereunder, the amount of such expenses shall be deemed to be "additional rent" hereunder and shall be due from Tenant to Landlord on the first day of the month following the incurring of such respective expenses. TWENTY-EIGHTH: TELEPHONE SERVICE. Telephone service to and throughout the Leased Premises shall be the responsibility of the Tenant. Notwithstanding provisions of Paragraph "TENTH," maintenance of telephone wiring and equipment within the Leased Premises shall be the responsibility of the Tenant for the term of the Lease. Installation of wiring and equipment shall comply with all local ordinances and regulations of the New York State Fire Underwriters. TWENTY-NINTH: JURY WAIVER. In the event that Landlord must proceed by summary proceeding to enforce any provision of the Lease, Tenant and Landlord hereby waive whatever right they may have to a jury trial with regard to any issues of law or fact in said proceeding. THIRTIETH: INVALIDITY. The invalidity or unenforceability of any provisions of this Lease shall in no way affect the validity or enforceability of any other provision hereof. No failure of Landlord to enforce any term hereof shall be deemed to be a waiver. THIRTY-FIRST: ADVANCED RENT. With the execution of this Lease, Tenant shall pay to Landlord the sum of TWENTY FOUR THOUSAND -21- FIVE HUNDRED SIXTY SEVEN and 50/100 ($24,567.50) DOLLARS as advanced rent. In the event the Tenant faithfully performs all terms and conditions of this Lease, said advanced rent shall be applied to the last month of the original Lease Term. THIRTY-SECOND: SUCCESSION. This Lease is binding upon and inures to the benefit of the heirs, assigns, and successors in interest to the parties. THIRTY-THIRD: RULES AND REGULATIONS. Tenant agrees to comply with all reasonable rules and regulations which the Landlord may establish from time to time for the protection and welfare of the Tenant, the Building, and all other tenants and occupants thereof. THIRTY-FOURTH: QUIET ENJOYMENT. Landlord shall, at all times during the term of this Lease, allow Tenant quiet enjoyment of said Leased Premises. THIRTY-FIFTH: FINANCING COOPERATION. Tenant will use its best efforts to cooperate with Landlord in satisfying reasonable requirements of Landlord's mortgagee, including the execution of the attached Estoppel Certificate, Schedule "D" attached hereto and made a part hereof, provided same does not materially alter the terms and conditions of this Lease. THIRTY-SIXTH: FINANCIAL STATEMENT. Tenant shall furnish to Landlord within ninety (90) days of the close of each fiscal year during the term of this Lease, a financial statement. This statement shall be for the confidential use of Landlord's mortgagee only and for no other purpose. THIRTY-SEVENTH: ARBITRATION. Any dispute between Landlord and Tenant arising out of the provisions of this Lease, excepting the payment of rent, taxes, mechanic's liens, deposits and the like, shall be submitted to arbitration in such a manner as the parties may agree upon, or if they cannot agree, in accordance with the rules of the American Arbitration Association. THIRTY-EIGHTH: SIGNAGE. Landlord reserves the right to maintain uniformity and conformity for all exterior signs including window signage of all tenants of the Building and/or complex in which the Leased Premises are located. Landlord reserves the right to maintain uniformity and conformity for all interior signs. Landlord at Tenant's request, shall provide Tenant with specifications for its signage and Tenant may, at its own expense, construct or install a sign in accordance with the aforesaid specifications. All requests for permission to erect, apply, and/or install signage must be made in writing to the Landlord and include a graphic illustration of the proposed sign. Landlord shall respond within fifteen (15) days to Tenant's request with either approval or disapproval of the proposed signage. THIRTY-NINTH: PARKING. Landlord shall provide car parks for Tenant within the confines of the parking lot shown as Area "B" on Schedule "A" located at the Sweet Home Centre, Dodge and Sweet Home Roads, Amherst, New York. Landlord reserves the right, throughout the term of this Lease, to assign Tenant specific on site car parks. In the event that the Leased Premises is expanded, Landlord shall provide a corresponding expansion of the parking area based on a ratio of six (6) car parks per one thousand (1,000) square feet of floor area so expanded. FORTIETH: JURISDICTION. The parties agree that venue for any judicial action shall be the County of Erie, State of New York. If either party does not maintain an office or residence in the County of Erie, State of New York, the time of the commencement of any action under this Lease, then such party hereby designates the Secretary of State for the State of New York as its agent for -23- the service of process. Any matters involving this Lease shall be governed by the laws of the State of New York. FORTY-FIRST: NO RECORDING. Neither this Lease nor any memorandum thereof shall be recorded. FORTY-SECOND: PARAGRAPH CAPTIONS. Paragraph headings set forth herein are for the convenience of the parties only, and the same shall not be deemed to limit or expand the terms and conditions set forth herein. IN WITNESS WHEREOF, the parties hereto have affixed their hands and seals the day and year first above mentioned. THE UNILAND PARTNERSHIP, L.P. By: _____________________________________ MANAGEMENT ADJUSTMENT BUREAU, INC. By: _____________________________________ -24- STATE OF NEW YORK ) ) SS. COUNTY OF ERIE ) On this _____ day of ______________ 1994 before me, the subscriber, personally appeared NANCY R. DOBSON, Executive Vice President in THE UNILAND PARTNERSHIP, L.P., a New York Limited Partnership doing business under the laws of the State of New York, and she acknowledged to me that she has executed the within Lease Agreement as such Executive Vice President acting on behalf of such partnership. ________________________________ STATE OF NEW YORK ) ) SS. COUNTY OF ERIE ) On this _______ day of ____________________ 1994 personally appeared ________________________________ of MANAGEMENT ADJUSTMENT BUREAU, INC. said corporation being named above, deposes and says that he resides at__________ _____________________________ ___________________________ and that he is an officer of said corporation, the corporation described in and who executed the foregoing Lease Agreement; that he knows the seal of said Corporation, that the seal affixed to said Instrument is such Corporate seal; that it was affixed by the Order of the Board of Directors of said Corporation and that he signed h__ name thereto by like order. __________________________________ SCHEDULE C Tenant shall, on its own stationery, provide to Landlord upon acceptance or possession of the premises, the following: "To Whom It May Concern: On __________________________ 1994, MANAGEMENT ADJUSTMENT BUREAU, INC. entered into a Lease Agreement with THE UNILAND PARTNERSHIP, L.P., for approximately TWENTY FIVE THOUSAND SIX HUNDRED SIXTY SEVEN (25,667) square feet of office space located at the Sweet Home Centre, Dodge and Sweet Home Roads, Amherst, New York. On the _____ day of _____________ 1994, Landlord tendered and Tenant accepted possession of premises. It is agreed by the parties that the Lease Agreement dated _______________________, 1994 commences on the first day of ________________ 1994, and terminates on the _____ day of ______________ 19__. SCHEDULE D TENANT ESTOPPEL LETTER ___________________________________ ___________________________________ ___________________________________ ___________________________________ Gentlemen: The undersigned, a Tenant under a lease dated _______________________ (the "Lease") between the undersigned and THE UNILAND PARTNERSHIP, L.P. (Landlord) for space comprising TWENTY FIVE THOUSAND SIX HUNDRED SIXTY SEVEN (25,667) square feet ("Leased Premises") in the Building located at the Sweet Home Centre, Dodge and Sweet Home Roads, Amherst, New York (the "Property"), understands that the Landlord is about to mortgage the Property to _______________________________________________ , in connection with which the Landlord's interest in the Lease may be collaterally assigned to the mortgagee. The undersigned provides the following information to the best of its knowledge with respect to the Lease: (a) The undersigned has accepted possession of the Leased Premises and has commenced paying rent under the Lease. (b) The remaining term of the Lease, including any option or renewal term, is ___________________, expiring on ____________________________. (c) The annual base rent being paid is $________________. (d) The amount of any advance rent held by Landlord or any other party is $___________________. (e) The date through which rent has been paid is _______________________, 19__. (f) There are no outstanding defaults, notices of default, claims or offsets arising out of its leasehold. (g) The Lease has not been modified or amended as of this date. (h) The undersigned has not received notice of any prior assignment of the Landlord's interest under the Lease. MANAGEMENT ADJUSTMENT BUREAU, INC. Dated: __________________________ BY: _______________________________ FIRST AMENDMENT TO LEASE BY AND BETWEEN THE UNILAND PARTNERSHIP, L.P. AND MANAGEMENT ADJUSTMENT BUREAU, INC. DATED: 12/10/94 Lease No. 2235-F FIRST AMENDMENT TO LEASE FIRST AMENDMENT TO LEASE dated the 10th day of December 1994, by and between THE UNILAND PARTNERSHIP, L.P., a New York Limited Partnership, University Corporate Centre, 100 Corporate Parkway, Suite 500, Amherst, New York 14226, hereinafter called "Landlord" and MANAGEMENT ADJUSTMENT BUREAU, INC. a New York Corporation, with offices located at 120 Pineview Drive, Amherst, New York 14226 hereinafter called "Tenant." WHEREAS, Landlord and Tenant entered into a Lease Agreement dated the 5th day of August, 1994 for TWENTY FIVE THOUSAND SIX HUNDRED SIXTY SEVEN (25,667) square feet of office and space located at the Sweet Home Centre, Dodge andSweet Home Road, Amherst, New York; and WHEREAS, Landlord and Tenant are desirous of increasing the Leased Premises by an additional FOUR THOUSAND (4,000) square feet making the total Leased Premises TWENTY NINE THOUSAND SIX HUNDRED SIXTY SEVEN (29,667) square feet ("Revised Leased Premises"). NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree that the Lease Agreement, dated the 5th day of August, 1994, between the parties shall be amended as follows: FIRST: Paragraph "FIRST: LEASED PREMISES". Landlord leases to Tenant and Tenant hereby takes office space comprising approximately TWENTY NINE THOUSAND SIX HUNDRED SIXTY SEVEN (29,667) square feet in a building located at the Sweet Home Centre, Dodge and Sweet Home Roads, Amherst, New York and more specifically designated on a plan attached hereto and designated as Schedule "AA" and made a part hereof. SECOND: Paragraph "THIRD: RENT." Upon the commencement of this First Amendment to Lease Term, Tenant shall pay rent to the Landlord as follows: A) On the first day of the first month of this First Amendment to Lease Term, the sum of TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY and 58/100 ($24,890.58) DOLLARS and on the first day of the second month of the tenancy and on the first day of each and every calendar month thereafter through the sixtieth month of the tenancy, Tenant shall pay to Landlord the sum of TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY and 58/100 ($24,890.58) DOLLARS. B) On the first day of the sixty-first through one hundred twentieth month of the tenancy, Tenant shall pay to Landlord the sum of TWENTY SIX THOUSAND EIGHT HUNDRED NINETY THREE and 08/100 ($26,893.08) DOLLARS. C) on the first day of the one hundred twenty first through one hundred eightieth month of the tenancy, Tenant shall pay to Landlord the sum of TWENTY EIGHT THOUSAND THREE HUNDRED NINETY SIX and 17/100 ($28,396.17) DOLLARS. All payments to be made in United States funds. THIRD: Paragraphs "THIRD: CONSTRUCTION OF LEASED PREMISES" and "FOURTH: DELAYS IN CONSTRUCTION" shall be amended as follows: Schedule "B" shall be changed to Schedule "BB". All other terms and conditions of these paragraphs shall remain the same. FOURTH: Paragraph "THIRTIETH: ADVANCED RENT" shall be amended as follows: Landlord acknowledges receipt of TWENTY FOUR THOUSAND FIVE HUNDRED SIXTY SEVEN and 50/100 ($24,567.50) DOLLARS advanced rent from Tenant. Upon the signing of this First Amendment to Lease an additional advanced rent of THREE THOUSAND EIGHT HUNDRED TWENTY EIGHT and 67/100 ($3,828.67) DOLLARS is due making the total advanced rent TWENTY EIGHT THOUSAND THREE HUNDRED NINETY SIX and 17/100 ($28,396.17) DOLLARS. In the event that Tenant faithfully performs all terms and conditions of the Lease Agreement and any extensions or renewals thereof, said advanced rent shall be applied to the last month of the term. -2- FIFTH: Except as specifically amended herein, the terms and conditions of the Lease Agreement between the parties entered into on or about the 5th day of August, 1994 shall continue in full force and effect throughout the renewal term. IN WITNESS WHEREOF, the parties have affixed their hands and seals the day and year first above written. THE UNILAND PARTNERSHIP, L.P. By: Nancy R. Dobson ------------------------------------- MANAGEMENT ADJUSTMENT BUREAU, INC. By: Michael Noah - President ------------------------------------- -3- STATE OF NEW YORK ) ) SS. COUNTY OF ERIE ) On this 10th day of December, 1994, personally appeared NANCY R. DOBSON, Executive Vice President in THE UNILAND PARTNERSHIP, L.P., a New York Limited Partnership doing business under the laws of the State of New York, and she acknowledged to me that she has executed the within First Amendment to Lease as such Executive Vice President acting on behalf of such partnership. Barbara A. Carter --------------------------- NOTARY PUBLIC My commission expires 3/30/96 STATE OF NEW YORK ) ) SS. COUNTY OF ERIE ) On this 10th day of November, 1994, before me, the subscriber personally appeared Michael Noah of MANAGEMENT ADJUSTMENT BUREAU, INC. the Corporation being named above, deposes and says that he/she resides at Amherst, New York, that he/she is an officer of said corporation, the corporation described in and who executed the foregoing First Amendment to Lease; that he/she knows the seal of said corporation, that the seal affixed to said Instrument is such corporate seal; that it was affixed by the order of the Board of Directors of said Corporation and that he/she signed his/her name thereto by like order. Robert J. Nelson ----------------------------- ROBERT J. NELSON Notary Public, State of New York Qualified in Erie County My Commission Expires Sept 30, 1995 SECOND AMENDMENT TO LEASE BY AND BETWEEN THE UNILAND PARTNERSHIP, L.P. AND MANAGEMENT ADJUSTMENT BUREAU, INC. DATED: As of 12/10/94 Lease No. 2235-F SECOND AMENDMENT TO LEASE SECOND AMENDMENT TO LEASE dated as of the 10th day of December, 1994, by and between THE UNILAND PARTNERSHIP, L.P., a New York Limited Partnership, University Corporate Centre, 100 Corporate Parkway, Suite 500, Amherst, New York 14226, hereinafter called "Landlord", and MANAGEMENT ADJUSTMENT BUREAU, INC., a New York Corporation, with offices located at 55 Dodge Road, Amherst, New York 14228, and a mailing address of P.O. Box 1166, Buffalo, New York 14240 hereinafter called "Tenant." WHEREAS, Landlord and Tenant entered into a Lease Agreement dated the 5th day of August, 1994 for TWENTY FIVE THOUSAND SIX HUNDRED SIXTY SEVEN (25,667) square feet of office and space located at the Sweet Home Centre, Dodge and Sweet Home Road, Amherst, New York; and WHEREAS, Landlord and Tenant are desirous of increasing the Leased Premises by an additional FOUR THOUSAND (4,000) square feet making the total Leased Premises TWENTY NINE THOUSAND SIX HUNDRED SIXTY SEVEN (29,667) square feet ("Revised Leased Premises"). WHEREAS, in order to implement such desire Landlord and Tenant previously executed a First Amendment to Lease dated December 10, 1994 which they now want to supersede with this Second Amendment to Lease. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree that the Lease Agreement, dated the 5th day of August, 1994, between the parties shall be amended as follows: FIRST: Paragraph "FIRST: LEASED PREMISES". Landlord leases to Tenant and Tenant hereby takes office space comprising approximately TWENTY NINE THOUSAND SIX HUNDRED SIXTY SEVEN (29,667) square feet in a building located at the Sweet Home Centre, Dodge and Sweet Home Roads, Amherst, New York and more specifically designated on a plan attached hereto and designated as Schedule "AA" and made a part hereof. SECOND: Paragraph "THIRD: RENT." Any reference to the dollar figure of the total base rent shall be deleted and subparagraph a) shall read as follows: a) The Base Rent due under the Lease shall be payable as follows: A) On the first day of the first month of this First Amendment to Lease Term, the sum of TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY AND 58/100 ($24,890.58) DOLLARS and on the first day of the second month of the tenancy and on the first day of each and every calendar month thereafter through the sixtieth month of the tenancy, Tenant shall pay to Landlord the sum of TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY and 58/100 ($24,890.58) DOLLARS. B) On the first day of the sixty-first through one hundred twentieth month of the tenancy, Tenant shall pay to Landlord the sum of TWENTY SIX THOUSAND EIGHT HUNDRED NINETY THREE and 08/100 ($26,893.08) DOLLARS. C) On the first day of the one hundred twenty first through one hundred eightieth month of the tenancy, Tenant shall pay to Landlord the sum of TWENTY EIGHT THOUSAND THREE HUNDRED NINETY SIX AND 17/100 ($28,396.17) DOLLARS. D) All rents shall be paid to Landlord or authorized agent at University Corporate Centre, 100 Corporate Parkway, Suite 500, Amherst, New York 14226, or at such other places as may be designated by Landlord from time to time. All rents payable in United States funds. THIRD: Paragraphs "FOURTH: CONSTRUCTION OF LEASED PREMISES," "FIFTH: DELAYS IN CONSTRUCTION" and "SIXTH: POSSESSION" shall be amended as follows: Schedule "B" shall be changed to Schedule "BB". All other terms and conditions of these paragraphs shall remain the same. FOURTH: Paragraph "THIRTY-FIRST: ADVANCED RENT" shall be amended as follows: Landlord acknowledges receipt of TWENTY FOUR THOUSAND FIVE HUNDRED SIXTY SEVEN and 50/100 ($24,567.50) DOLLARS advanced rent from Tenant. Upon the signing of the First Amendment to Lease an additional advanced rent of THREE THOUSAND EIGHT HUNDRED TWENTY EIGHT AND 67/100 ($3,828.67) DOLLARS was received by Landlord making the total advanced rent TWENTY EIGHT THOUSAND THREE HUNDRED NINETY SIX and 17/100 ($28,396.17) DOLLARS. In the event that Tenant faithfully performs all terms and conditions of the Lease Agreement and any extensions or renewals thereof, said advanced rent shall be applied to the last month of the term. FIFTH: Except as specifically amended herein, the terms and conditions of the Lease Agreement between the parties entered into on or about the 5th day of August, 1994 is ratified, confirmed and approved and shall continue in full force and effect throughout the renewal term. This Second Amendment of Lease is executed and delivered to clarify as of December 10, 1994 the agreement of the parties. As such it supersedes and replaces the First Amendment of Lease. IN WITNESS WHEREOF, the parties have affixed their hands and seals the day and year first above written. THE UNILAND PARTNERSHIP, L.P. By: __________________________________ General Partner MANAGEMENT ADJUSTMENT BUREAU, INC. By: __________________________________ President STATE OF NEW YORK ) COUNTY OF ERIE ) On this _____ day of __________________, 1995, personally appeared CARL MONTANTE, General Partner of THE UNILAND PARTNERSHIP, L.P., a New York Limited Partnership doing business under the laws of the State of New York, and he acknowledged to me that he has executed the within Second Amendment to Lease as such General Partner acting on behalf of such partnership. ____________________________________ STATE OF NEW YORK ) COUNTY OF ERIE ) On this _____ day of ______________________, 1995, before me, the subscriber personally appeared Michael Noah of MANAGEMENT ADJUSTMENT BUREAU, INC. the Corporation being named above, deposes and says that he resides at Amherst, New York, that he is the President of the corporation, the corporation described in and which executed the foregoing Second Amendment to Lease; and that he signed his name thereto by order of the board of directors of said corporation. __________________________________ EX-10.10 13 1995 STOCK OPTION PLAN Exhibit 10.10 NCO GROUP, INC. AMENDED AND RESTATED 1995 STOCK OPTION PLAN 1. Purpose of Plan The purpose of this Amended and Restated 1995 Stock Option Plan (the "Plan") is to provide additional incentive to officers, key employees and directors of, and important consultants to, NCO Group, Inc., a Pennsylvania corporation (the "Company"), and each present or future parent or subsidiary corporation, by encouraging them to invest in shares of the Company's common stock, no par value ("Common Stock"), and thereby acquire a proprietary interest in the Company and an increased personal interest in the Company's continued success and progress. 2. Aggregate Number of Shares 221,719 shares of the Company's Common Stock shall be the aggregate number of shares which may be issued under this Plan. Notwithstanding the foregoing, in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee (defined in Section 4(a)), deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under this Plan shall be appropriately adjusted in a manner determined in the sole discretion of the Committee. Reacquired shares of the Company's Common Stock, as well as unissued shares, may be used for the purpose of this Plan. Common Stock of the Company subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under this Plan. The Plan as amended and restated reflects the appropriate adjustments with respect to the 46.56-for-1 stock split effected in September 1996. 3. Class of Persons Eligible to Receive Options All officers, key employees and directors of, and important consultants to, the Company and any present or future Company parent or subsidiary corporation are eligible to receive an option or options under this Plan, provided, however, that Incentive Stock Options (defined in Section 5(a)) may be issued only to persons who are employees of the Company or any subsidiary corporation. The individuals who shall, in fact, receive an option or options shall be selected by the Committee, in its sole discretion, except as otherwise specified in Section 4 hereof. No individual may receive options under this Plan for more than 90% of the total number of shares of the Company's Common Stock authorized for issuance under this Plan. 4. Administration of Plan (a) Prior to the registration of the Company's Common Stock under Section 12 of the Securities Exchange Act of 1934, this Plan shall be administered by the Company's Board of Directors and, after such registration, by the Compensation Committee ("Committee") appointed by the Company's Board of Directors provided, however, that at the option of the Board of Directors, the Plan may be administered by the Board of Directors of the Corporation at any time and from time to time. The Committee shall consist of a minimum of two and a maximum of five members of the Board of Directors, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any future corresponding rule, except that the failure of the Committee or of the Board of Directors for any reason to be composed solely of Non-Employee Directors shall not prevent an option from being considered granted under this Plan. The Committee shall, in addition to its other authority and subject to the provisions of this Plan, determine which individuals shall in fact be granted an option or options, whether the option shall be an Incentive Stock Option or a Non-Qualified Stock Option (as such terms are defined in Section 5(a)), the number of shares to be subject to each of the options, the time or times at which the options shall be granted, the rate of option exercisability, and, subject to Section 5 hereof, the price at which each of the options is exercisable and the duration of the option. The term "Committee", as used in this Plan and the options granted hereunder, refers to the Board of Directors prior to the registration of the Company's Common Stock under Section 12 of the Securities Exchange Act of 1934 and, after such registration, to the Committee or to the Board of Directors, if the Board elects to administer the Plan as provided above. (b) The Committee shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable. A majority of the members of the Committee shall constitute a quorum for all purposes. The vote or written consent of a majority of the members of the Committee on a particular matter shall constitute the act of the Committee on such matter. The Committee shall have the right to construe the Plan and the options issued pursuant to it, to correct defects and omissions and to reconcile inconsistencies to the extent necessary to effectuate the Plan and the options issued pursuant to it, and such action shall be final, binding and conclusive upon all parties concerned. No member of the Committee or the Board of Directors shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of an authority or discretion granted in connection with the Plan to a Committee or the Board of Directors, or for the acts or omissions of any other members of a Committee or the Board of Directors. Subject to the numerical limitations on Committee membership set forth in Section 4(a) hereof, the Board of Directors may at any time appoint additional members of the Committee and may at any time remove any member of the Committee with or without cause. Vacancies in the Committee, however caused, may be filled by the Board of Directors, if it so desires. 5. Incentive Stock Options and Non-Qualified Stock Options (a) Options issued pursuant to this Plan may be either Incentive Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified Stock Options granted pursuant to Section 5(c) hereof, as determined by the Committee. An "Incentive Stock Option" is an option which satisfies all of the requirements of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder, and a "Non-Qualified Stock Option" is an option which either does not satisfy all of those requirements or the terms of the option provide that it will not be treated as an Incentive Stock Option. The Committee may grant both an Incentive Stock Option and a Non-Qualified Stock Option to the same person, or more than one of each type of option to the same person. The option price for Incentive Stock Options issued under this Plan shall be equal at least to the fair market value (as defined below) of the Company's Common Stock on the date of the grant of the option, provided, however, that if an Incentive Stock Option is granted to an individual who, at the time the option is granted, is deemed to own more than 10 percent of the total combined voting power of all classes of stock of the Company or any subsidiary corporation of the Company as more fully set forth in Section 422(b)(6) of the Code (after giving effect to the ownership attribution rules of 422(c)(5) of the Code) (a "10% Shareholder"), such option shall comply with the provisions of Section 422(c)(5) of the Code, including without limitation, requirements that the option price shall not be less than 110 percent of the fair market value, as determined by the Committee in accordance with its interpretation of the requirements of Section 422 of the Code and the regulations thereunder, of the Company's Common Stock on the date of grant of the option, and such option shall not be exercisable after the expiration of five years from the date the option is granted. The option price for Non-Qualified Stock Options issued under this Plan may, in the sole discretion of the Committee, be less than the fair market value of the Common Stock on the date of the grant of the option. The fair market value of the Company's Common Stock on any particular date shall mean the last reported sale price of a share of the Company's Common Stock on any stock exchange on which such stock is then listed or admitted to trading, or on the Nasdaq National Market or Nasdaq SmallCap Market, on such date, or if no sale took place on such day, the last such date on which a sale took place, or if the Common Stock is not then quoted on the Nasdaq National Market or the Nasdaq SmallCap Market, or listed or admitted to trading on any stock exchange, the average of the bid and asked prices in the over-the-counter market on such date, or if none of the foregoing, a price determined in good faith by the Committee to equal the fair market value per share of the Common Stock. (b) Subject to the authority of the Committee set forth in Section 4(a) hereof, Incentive Stock Options issued to officers and key employees pursuant to this Plan shall be issued substantially in the form set forth in Appendix I hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Incentive Stock Options shall not be exercisable after the expiration of ten years (five years in the case of 10% Shareholders) from the date such options are granted, unless terminated earlier under the terms of the option. At the time of the grant of an Incentive Stock Option hereunder, the Committee may, in its discretion, amend or supplement any of the option terms contained in Appendix I for any particular optionee, provided that the option as amended or supplemented satisfies the requirements of Section 422(b) of the Code and the regulations thereunder. Each of the options granted pursuant to this Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that term is defined in Section 422(b) of the Code and the regulations thereunder. In the event this Plan or any option granted pursuant to this Section 5(b) is in any way inconsistent with the applicable legal requirements of the Code or the regulations thereunder for an Incentive Stock Option, this Plan and such option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. (c) Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued to officers and other key employees pursuant to this Plan shall be issued substantially in the form set forth in Appendix II hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued to directors and important consultants pursuant to this Plan shall be issued substantially in the form set forth in Appendix III hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Non-Qualified Stock Options shall expire ten years after the date they are granted, unless terminated earlier under the option terms. At the time of granting a Non-Qualified Stock Option hereunder, the Committee may, in its discretion, amend or supplement any of the option terms contained in Appendix II or Appendix III for any particular optionee. (d) Neither the Company nor any of its current or future parent, subsidiaries or affiliates, nor their officers, directors, shareholders, stock option plan committees, employees or agents shall have any liability to any optionee in the event (i) an option granted pursuant to Section 5(b) hereof does not qualify as an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder; (ii) any optionee does not obtain the tax treatment pertaining to an Incentive Stock Option; or (iii) any option granted pursuant to Section 5(c) hereof is an "Incentive Stock Option." 6. Amendment, Supplement, Suspension and Termination Options shall not be granted pursuant to this Plan after the expiration of ten years from the date the Plan is adopted by the Board of Directors of the Company. The Board of Directors reserves the right at any time, and from time to time, to amend or supplement this Plan and outstanding options granted under the Plan in any way, or to suspend or terminate the Plan, effective as of such date, which date may be either before or after the taking of such action, as may be specified by the Board of Directors; provided, however, that such action shall not adversely affect holders of options granted under the Plan prior to the actual date on which such action occurred. If an amendment or supplement of this Plan is required by the Code or the regulations thereunder to be approved by the shareholders of the Company in order to permit the granting of "Incentive Stock Options" (as that term is defined in Section 422(b) of the Code and regulations thereunder) pursuant to the amended or supplemented Plan, such amendment or supplement shall also be approved by the shareholders of the Company in such manner as is prescribed by the Code and the regulations thereunder. If the Board of Directors voluntarily submits a proposed amendment, supplement, suspension or termination for shareholder approval, such submission shall not require any future amendments, supplements, suspensions or terminations (whether or not relating to the same provision or subject matter) to be similarly submitted for shareholder approval. 7. Effectiveness of Plan This Plan shall become effective on the date of its adoption by the Company's Board of Directors, subject however to approval by the holders of the Company's Common Stock in the manner as prescribed in the Code and the regulations thereunder. Options may be granted under this Plan prior to obtaining shareholder approval, provided such options shall not be exercisable until shareholder approval is obtained. 8. General Conditions (a) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any employee the right to continue in the employ of the Company or any affiliated or subsidiary corporation or interfere in any way with the rights of the Company or any affiliated or subsidiary corporation to terminate his employment in any way. (b) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any director or consultant the right to continue as a director of, or consultant to, the Company or any affiliated or subsidiary corporation or interfere in any way with the rights of the Company or any affiliated or subsidiary corporation, or their respective shareholders, to terminate the directorship of any such director or the consultancy relationship of any such consultant. (c) Corporate action constituting an offer of stock for sale to any person under the terms of the options to be granted hereunder shall be deemed complete as of the date when the Committee authorizes the grant of the option to the such person, regardless of when the option is actually delivered to such person or acknowledged or agreed to by him. (d) The terms "parent corporation" and "subsidiary corporation" as used throughout this Plan, and the options granted pursuant to this Plan, shall (except as otherwise provided in the option form) have the meaning that is ascribed to that term when contained in Section 422(b) of the Code and the regulations thereunder, and the Company shall be deemed to be the grantor corporation for purposes of applying such meaning. (e) References in this Plan to the Code shall be deemed to also refer to the corresponding provisions of any future United States revenue law. (f) The use of the masculine pronoun shall include the feminine gender whenever appropriate. APPENDIX I INCENTIVE STOCK OPTION To: --------------------------------------------------------------------------- Name --------------------------------------------------------------------------- Address Date of Grant: ---------------------------------------------------------------- You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $_________ per share pursuant to the Company's Amended and Restated 1995 Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years (five years in the case of 10% Shareholders, as defined in the Plan) from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated (whether such termination be voluntary or involuntary) other than by reason of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or death, in which case your option will terminate one year from the date of termination of employment due to disability or death (but in no event later than the Scheduled Termination Date). After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment with the Company or a Company parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your employment is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. This option reflects the appropriate adjustments with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall, if possible, be an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder. In the event this option is in any way inconsistent with the legal requirements of the Code or the regulations thereunder for an "Incentive Stock Option," this option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. Nothing herein shall modify your status as an at-will employee of the Company. Further, nothing herein guarantees you employment for any specified period of time. This means that either you or the Company may terminate your employment at any time for any reason, or no reason. You recognize that, for instance, you may terminate your employment or the Company may terminate your employment prior to the date on which your option becomes vested. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: ----------------------------- I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. - -------------------------------- ------------------------ (Signature) (Date) APPENDIX II NON-QUALIFIED STOCK OPTION FOR OFFICERS AND OTHER KEY EMPLOYEES To: --------------------------------------------------------------------------- Name --------------------------------------------------------------------------- Address Date of Grant: ----------------------------------------------------------------- You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $__________ per share pursuant to the Company's 1995 Amended and Restated Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated (whether such termination be voluntary or involuntary) other than by reason of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or death, in which case your option will terminate one year from the date of termination of employment due to disability or death (but in no event later than the Scheduled Termination Date). After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment with the Company or a Company parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your employment is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. This option reflects the appropriate adjustments with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422 of the Code and the regulations thereunder. Nothing herein shall modify your status as an at-will employee of the Company. Further, nothing herein guarantees you employment for any specified period of time. This means that either you or the Company may terminate your employment at any time for any reason, or no reason. You recognize that, for instance, you may terminate your employment or the Company may terminate your employment prior to the date on which your option becomes vested. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: --------------------------- I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. - ---------------------------------- ------------------------ (Signature) (Date) APPENDIX III NON-QUALIFIED STOCK OPTION FOR DIRECTORS AND IMPORTANT CONSULTANTS To: ---------------------------------------------------------------------------- Name ---------------------------------------------------------------------------- Address Date of Grant: ----------------------------------------------------------------- You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $__________ per share pursuant to the Company's 1995 Amended and Restated Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which you cease for any reason to be a director of, or consultant to, the Company or a subsidiary corporation (whether by death, disability, resignation, removal, failure to be reappointed, reelected or otherwise, or the expiration of any consulting arrangement, and regardless of whether the failure to continue as a director or consultant was for cause or without cause or otherwise), but in no event later than ten years from the date this option is granted. After the date you cease to be a director or consultant, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date you ceased to be a director or consultant. If you are a director of a subsidiary corporation, your directorship shall be deemed to have terminated on the date such company ceases to be a subsidiary corporation, unless you are also a director of the Company or another subsidiary corporation, or on that date became a director of the Company or another subsidiary corporation. Your directorship or consultancy shall not be deemed to have terminated if you cease being a director of, or consultant to, the Company or a subsidiary corporation but are or concurrently therewith become a director of, or consultant to, the Company or another subsidiary corporation. Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your directorship or consultancy is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. This option reflects the appropriate adjustments with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: ---------------------------- I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. - --------------------------------------- ----------------------- (Signature) (Date) EX-10.11 14 1996 STOCK OPTION PLAN Exhibit 10.11 NCO GROUP, INC. 1996 STOCK OPTION PLAN 1. Purpose of Plan The purpose of this 1996 Stock Option Plan (the "Plan") is to provide additional incentive to officers, key employees and directors of, and important consultants to, NCO Group, Inc., a Pennsylvania corporation (the "Company"), and each present or future parent or subsidiary corporation, by encouraging them to invest in shares of the Company's common stock, no par value ("Common Stock"), and thereby acquire a proprietary interest in the Company and an increased personal interest in the Company's continued success and progress. 2. Aggregate Number of Shares 218,413 shares of the Company's Common Stock shall be the aggregate number of shares which may be issued under this Plan. Notwithstanding the foregoing, in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee (defined in Section 4(a)), deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under this Plan shall be appropriately adjusted in a manner determined in the sole discretion of the Committee. Reacquired shares of the Company's Common Stock, as well as unissued shares, may be used for the purpose of this Plan. Common Stock of the Company subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under this Plan. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. 3. Class of Persons Eligible to Receive Options All officers, key employees and directors of, and important consultants to, the Company and any present or future Company parent or subsidiary corporation are eligible to receive an option or options under this Plan, provided, however, that Incentive Stock Options (defined in Section 5(a)) may be issued only to persons who are employees of the Company or any subsidiary corporation. The individuals who shall, in fact, receive an option or options shall be selected by the Committee, in its sole discretion, except as otherwise specified in Section 4 hereof. No individual may receive options under this Plan for more than 90% of the total number of shares of the Company's Common Stock authorized for issuance under this Plan. 4. Administration of Plan (a) Prior to the registration of the Company's Common Stock under Section 12 of the Securities Exchange Act of 1934, this Plan shall be administered by the Company's Board of Directors and, after such registration, by the Compensation Committee ("Committee") appointed by the Company's Board of Directors provided, however, that at the option of the Board of Directors, the Plan may be administered by the Board of Directors of the Corporation at any time and from time to time. The Committee shall consist of a minimum of two and a maximum of five members of the Board of Directors, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any future corresponding rule, except that the failure of the Committee or of the Board of Directors for any reason to be composed solely of Non-Employee Directors shall not prevent an option from being considered granted under this Plan. The Committee shall, in addition to its other authority and subject to the provisions of this Plan, determine which individuals shall in fact be granted an option or options, whether the option shall be an Incentive Stock Option or a Non-Qualified Stock Option (as such terms are defined in Section 5(a)), the number of shares to be subject to each of the options, the time or times at which the options shall be granted, the rate of option exercisability, and, subject to Section 5 hereof, the price at which each of the options is exercisable and the duration of the option. The term "Committee", as used in this Plan and the options granted hereunder, refers to the Board of Directors prior to the registration of the Company's Common Stock under Section 12 of the Securities Exchange Act of 1934 and, after such registration, to the Committee or to the Board of Directors, if the Board elects to administer the Plan as provided above. (b) The Committee shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable. A majority of the members of the Committee shall constitute a quorum for all purposes. The vote or written consent of a majority of the members of the Committee on a particular matter shall constitute the act of the Committee on such matter. The Committee shall have the right to construe the Plan and the options issued pursuant to it, to correct defects and omissions and to reconcile inconsistencies to the extent necessary to effectuate the Plan and the options issued pursuant to it, and such action shall be final, binding and conclusive upon all parties concerned. No member of the Committee or the Board of Directors shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of an authority or discretion granted in connection with the Plan to a Committee or the Board of Directors, or for the acts or omissions of any other members of a Committee or the Board of Directors. Subject to the numerical limitations on Committee membership set forth in Section 4(a) hereof, the Board of Directors may at any time appoint additional members of the Committee and may at any time remove any member of the Committee with or without cause. Vacancies in the Committee, however caused, may be filled by the Board of Directors, if it so desires. 5. Incentive Stock Options and Non-Qualified Stock Options (a) Options issued pursuant to this Plan may be either Incentive Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified Stock Options granted pursuant to Section 5(c) hereof, as determined by the Committee. An "Incentive Stock Option" is an option which satisfies all of the requirements of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder, and a "Non-Qualified Stock Option" is an option which either does not satisfy all of those requirements or the terms of the option provide that it will not be treated as an Incentive Stock Option. The Committee may grant both an Incentive Stock Option and a Non-Qualified Stock Option to the same person, or more than one of each type of option to the same person. The option price for Incentive Stock Options issued under this Plan shall be equal at least to the fair market value (as defined below) of the Company's Common Stock on the date of the grant of the option, provided, however, that if an Incentive Stock Option is granted to an individual who, at the time the option is granted, is deemed to own more than 10 percent of the total combined voting power of all classes of stock of the Company or any subsidiary corporation of the Company as more fully set forth in Section 422(b)(6) of the Code (after giving effect to the ownership attribution rules of 422(c)(5) of the Code) (a "10% Shareholder"), such option shall comply with the provisions of Section 422(c)(5) of the Code, including without limitation, requirements that the option price shall not be less than 110 percent of the fair market value, as determined by the Committee in accordance with its interpretation of the requirements of Section 422 of the Code and the regulations thereunder, of the Company's Common Stock on the date of grant of the option, and such option shall not be exercisable after the expiration of five years from the date the option is granted. The option price for Non-Qualified Stock Options issued under this Plan may, in the sole discretion of the Committee, be less than the fair market value of the Common Stock on the date of the grant of the option. The fair market value of the Company's Common Stock on any particular date shall mean the last reported sale price of a share of the Company's Common Stock on any stock exchange on which such stock is then listed or admitted to trading, or on the Nasdaq National Market or Nasdaq SmallCap Market, on such date, or if no sale took place on such day, the last such date on which a sale took place, or if the Common Stock is not then quoted on the Nasdaq National Market or the Nasdaq SmallCap Market, or listed or admitted to trading on any stock exchange, the average of the bid and asked prices in the over-the-counter market on such date, or if none of the foregoing, a price determined in good faith by the Committee to equal the fair market value per share of the Common Stock. (b) Subject to the authority of the Committee set forth in Section 4(a) hereof, Incentive Stock Options issued to officers and key employees pursuant to this Plan shall be issued substantially in the form set forth in Appendix I hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Incentive Stock Options shall not be exercisable after the expiration of ten years (five years in the case of 10% Shareholders) from the date such options are granted, unless terminated earlier under the terms of the option. At the time of the grant of an Incentive Stock Option hereunder, the Committee may, in its discretion, amend or supplement any of the option terms contained in Appendix I for any particular optionee, provided that the option as amended or supplemented satisfies the requirements of Section 422(b) of the Code and the regulations thereunder. Each of the options granted pursuant to this Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that term is defined in Section 422(b) of the Code and the regulations thereunder. In the event this Plan or any option granted pursuant to this Section 5(b) is in any way inconsistent with the applicable legal requirements of the Code or the regulations thereunder for an Incentive Stock Option, this Plan and such option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. (c) Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued to officers and other key employees pursuant to this Plan shall be issued substantially in the form set forth in Appendix II hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued to directors and important consultants pursuant to this Plan shall be issued substantially in the form set forth in Appendix III hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Non-Qualified Stock Options shall expire ten years after the date they are granted, unless terminated earlier under the option terms. At the time of granting a Non-Qualified Stock Option hereunder, the Committee may, in its discretion, amend or supplement any of the option terms contained in Appendix II or Appendix III for any particular optionee. (d) Neither the Company nor any of its current or future parent, subsidiaries or affiliates, nor their officers, directors, shareholders, stock option plan committees, employees or agents shall have any liability to any optionee in the event (i) an option granted pursuant to Section 5(b) hereof does not qualify as an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder; (ii) any optionee does not obtain the tax treatment pertaining to an Incentive Stock Option; or (iii) any option granted pursuant to Section 5(c) hereof is an "Incentive Stock Option." 6. Amendment, Supplement, Suspension and Termination Options shall not be granted pursuant to this Plan after the expiration of ten years from the date the Plan is adopted by the Board of Directors of the Company. The Board of Directors reserves the right at any time, and from time to time, to amend or supplement this Plan and outstanding options granted under the Plan in any way, or to suspend or terminate the Plan, effective as of such date, which date may be either before or after the taking of such action, as may be specified by the Board of Directors; provided, however, that such action shall not adversely affect holders of options granted under the Plan prior to the actual date on which such action occurred. If an amendment or supplement of this Plan is required by the Code or the regulations thereunder to be approved by the shareholders of the Company in order to permit the granting of "Incentive Stock Options" (as that term is defined in Section 422(b) of the Code and regulations thereunder) pursuant to the amended or supplemented Plan, such amendment or supplement shall also be approved by the shareholders of the Company in such manner as is prescribed by the Code and the regulations thereunder. If the Board of Directors voluntarily submits a proposed amendment, supplement, suspension or termination for shareholder approval, such submission shall not require any future amendments, supplements, suspensions or terminations (whether or not relating to the same provision or subject matter) to be similarly submitted for shareholder approval. 7. Effectiveness of Plan This Plan shall become effective on the date of its adoption by the Company's Board of Directors, subject however to approval by the holders of the Company's Common Stock in the manner as prescribed in the Code and the regulations thereunder. Options may be granted under this Plan prior to obtaining shareholder approval, provided such options shall not be exercisable until shareholder approval is obtained. 8. General Conditions (a) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any employee the right to continue in the employ of the Company or any affiliated or subsidiary corporation or interfere in any way with the rights of the Company or any affiliated or subsidiary corporation to terminate his employment in any way. (b) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any director or consultant the right to continue as a director of, or consultant to, the Company or any affiliated or subsidiary corporation or interfere in any way with the rights of the Company or any affiliated or subsidiary corporation, or their respective shareholders, to terminate the directorship of any such director or the consultancy relationship of any such consultant. (c) Corporate action constituting an offer of stock for sale to any person under the terms of the options to be granted hereunder shall be deemed complete as of the date when the Committee authorizes the grant of the option to the such person, regardless of when the option is actually delivered to such person or acknowledged or agreed to by him. (d) The terms "parent corporation" and "subsidiary corporation" as used throughout this Plan, and the options granted pursuant to this Plan, shall (except as otherwise provided in the option form) have the meaning that is ascribed to that term when contained in Section 422(b) of the Code and the regulations thereunder, and the Company shall be deemed to be the grantor corporation for purposes of applying such meaning. (e) References in this Plan to the Code shall be deemed to also refer to the corresponding provisions of any future United States revenue law. (f) The use of the masculine pronoun shall include the feminine gender whenever appropriate. APPENDIX I INCENTIVE STOCK OPTION To: --------------------------------------------------------------------------- Name --------------------------------------------------------------------------- Address Date of Grant: ---------------------------------------------------------------- You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $__________ per share pursuant to the Company's 1996 Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years (five years in the case of 10% Shareholders, as defined in the Plan) from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated (whether such termination be voluntary or involuntary) other than by reason of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or death, in which case your option will terminate one year from the date of termination of employment due to disability or death (but in no event later than the Scheduled Termination Date). After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment with the Company or a Company parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your employment is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall, if possible, be an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder. In the event this option is in any way inconsistent with the legal requirements of the Code or the regulations thereunder for an "Incentive Stock Option," this option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. Nothing herein shall modify your status as an at-will employee of the Company. Further, nothing herein guarantees you employment for any specified period of time. This means that either you or the Company may terminate your employment at any time for any reason, or no reason. You recognize that, for instance, you may terminate your employment or the Company may terminate your employment prior to the date on which your option becomes vested. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: ----------------------------------- I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. - ------------------------------------- --------------------------- (Signature) (Date) APPENDIX II NON-QUALIFIED STOCK OPTION FOR OFFICERS AND OTHER KEY EMPLOYEES To: ---------------------------------------------------------------------------- Name ---------------------------------------------------------------------------- Address Date of Grant: ----------------------------------------------------------------- You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $___________ per share pursuant to the Company's 1996 Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated (whether such termination be voluntary or involuntary) other than by reason of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or death, in which case your option will terminate one year from the date of termination of employment due to disability or death (but in no event later than the Scheduled Termination Date). After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment with the Company or a Company parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your employment is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422 of the Code and the regulations thereunder. Nothing herein shall modify your status as an at-will employee of the Company. Further, nothing herein guarantees you employment for any specified period of time. This means that either you or the Company may terminate your employment at any time for any reason, or no reason. You recognize that, for instance, you may terminate your employment or the Company may terminate your employment prior to the date on which your option becomes vested. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: ----------------------------- I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. - -------------------------------- ----------------------------- (Signature) (Date) APPENDIX III NON-QUALIFIED STOCK OPTION FOR DIRECTORS AND IMPORTANT CONSULTANTS To: ---------------------------------------------------------------------------- Name ---------------------------------------------------------------------------- Address Date of Grant: ----------------------------------------------------------------- You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $ per share pursuant to the Company's 1996 Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which you cease for any reason to be a director of, or consultant to, the Company or a subsidiary corporation (whether by death, disability, resignation, removal, failure to be reappointed, reelected or otherwise, or the expiration of any consulting arrangement, and regardless of whether the failure to continue as a director or consultant was for cause or without cause or otherwise), but in no event later than ten years from the date this option is granted. After the date you cease to be a director or consultant, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date you ceased to be a director or consultant. If you are a director of a subsidiary corporation, your directorship shall be deemed to have terminated on the date such company ceases to be a subsidiary corporation, unless you are also a director of the Company or another subsidiary corporation, or on that date became a director of the Company or another subsidiary corporation. Your directorship or consultancy shall not be deemed to have terminated if you cease being a director of, or consultant to, the Company or a subsidiary corporation but are or concurrently therewith become a director of, or consultant to, the Company or another subsidiary corporation. Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your directorship or consultancy is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: --------------------------- I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. - --------------------------------------- -------------------- (Signature) (Date) EX-10 15 EXHIBIT 10.12 EXHIBIT 10.12 NCO GROUP, INC. 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose of Plan The purpose of the 1996 Stock Option Plan for Non-Employee Directors (the "Plan") contained herein is to enhance the ability of NCO Group, Inc. a Pennsylvania corporation (the "Company") to attract, retain and motivate members of its Board of Directors and to provide additional incentive to members of its Board of Directors by encouraging them to invest in shares of the Company 's common stock and thereby acquire a proprietary interest in the Company and an increased personal interest in the Company's continued success and progress, to the mutual benefit of directors, employees and shareholders. 2. Aggregate Number of Shares 24,258 shares of the Company's common stock, no par value ("Common Stock"), shall be the aggregate number of shares which may be issued under this Plan. Notwithstanding the foregoing, in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Board of Directors deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under this Plan shall be appropriately adjusted in a manner determined in the sole discretion of the Board of Directors. Reacquired shares of the Company's Common Stock, as well as unissued shares, may be used for the purpose of this Plan. Common Stock of the Company subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under this Plan. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. 3. Participation Each director of the Company at the close of business on the effective date ("Effective Date") of the Plan who is not an employee of the Company or any Company subsidiary corporation shall be automatically granted an option to purchase 1,000 shares of the Company's Common Stock (such figure to be subject to adjustment for the same events described in Section 2 hereof). Thereafter, each person who is not an employee of the Company or any Company subsidiary corporation on the date of grant of an option hereunder and who is (i) appointed as a director by the Board of Directors to fill any vacancy on the Board (an "Appointment"); (ii) elected or reelected as a director of the Company at any annual or special meeting of shareholders of the Company; or (iii) continues as a director of the Company as of the date of the annual or special meeting of shareholders of the Company at which directors of the Company are elected or reelected shall, as of the date of such Appointment ("Appointment Date") or each such annual or special meeting of shareholders, as the case may be, automatically be granted an option to purchase 1,000 shares of the Company's Common Stock (such figure to be subject to adjustment for the same events described in Section 2 hereof); provided, however, that no director shall receive an option or options under this Plan to purchase more than 1,000 shares of the Company's Common Stock in any calendar year (such figure to be subject to adjustment for the same events described in Section 2 hereof); and provided, further, however that if at any time there are insufficient shares then be available for grant under this Plan to all persons who are to receive a option on such date, then each such person shall automatically be granted an option to purchase such lower number of shares as shall be equal to the number of shares as shall then available (if any) for grant under this Plan divided by the number of persons who are to receive an option on such date, subject, however, to the provisions of Section 6 hereof. The Effective Date, the Appointment Date, or the election or reelection of directors at an annual or special meeting of shareholders after the Effective Date of the Plan, as the case may be, shall constitute the grant of the option and the date of the grant of such option to each such director. 4. Administration of Plan This Plan shall be administered by the Board of Directors of the Company. The Board of Directors of the Company shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable. A majority of the members of the Board of Directors of the Company shall constitute a quorum for all purposes. The vote or written consent of a majority of the members of the Board of Directors of the Company on a particular matter shall constitute the act of the Board of Directors of the Company on such matter. The Board of Directors of the Company shall have the exclusive right to construe the Plan and the options issued pursuant to it, to correct defects and omissions and to reconcile inconsistencies to the extent necessary to effectuate the purpose of this Plan and the options issued pursuant to it, and such action shall be final, binding and conclusive upon all parties concerned. No member of the Board of Directors of the Company shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of any authority or discretion granted in connection with the Plan to the Board of Directors, or for the acts or omissions of any other members of the Board of Directors. -2- 5. Non-Qualified Stock Options, Option Price and Term (a) Options issued pursuant to this Plan shall be non-qualified stock options. A non-qualified stock option is an option which does not satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The option price for the non-qualified stock options issued under this Plan shall be equal to the fair market value, as determined by the Board of Directors of the Company, of the Company's Common Stock on the date of the grant of the option. The fair market value of the Company's Common Stock on any particular date shall mean the last reported sale price of a share of the Company's Common Stock on any stock exchange on which such stock is then listed or admitted to trading, or on the Nasdaq National Market or Nasdaq SmallCap Market, on such date, or if no sale took place on such day, the last such date on which a sale took place, or if the Common Stock is not then quoted on the Nasdaq National Market or Nasdaq SmallCap Market, or listed or admitted to trading on any stock exchange, the average of the bid and asked prices in the over-the-counter market on such date, or if none of the foregoing, a price determined in good faith by the Board of Directors to equal the fair market value per share of the Common Stock. (b) Options issued pursuant to this Plan shall be issued substantially in the form set forth in Appendix I hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Options shall expire ten years after the date they are granted, unless terminated earlier as provided herein. 6. Amendment, Supplement, Suspension and Termination Options shall not be granted pursuant to this Plan after the expiration of ten years from and after the date this Plan is approved by the shareholders of the Company. The Board of Directors of the Company reserves the right at any time, and from time to time, to amend or supplement this Plan in any way, or to suspend or terminate it, effective as of such date, which date may be either before or after the taking of such action, as may be specified by the Board of Directors of the Company. If the Board of Directors voluntarily submits a proposed amendment, supplement, suspension or termination for shareholder approval, such submission shall not require any future amendments, supplements (whether or not relating to the same provision or subject matter), suspensions or terminations to be similarly submitted for shareholder approval. 7. Effectiveness of Plan -3- This Plan shall become effective on the date of its adoption by the Company's Board of Directors, subject however to approval by the holders of the Company's Common Stock. 8. General Conditions (a) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any director the right to continue as a director of the Company or interfere in any way with the rights of the Company to terminate him as a director. (b) Corporate action constituting an offer of stock for sale to any director under the terms of the options to be granted hereunder shall be deemed complete as of the Effective Date, the Appointment Date, or the date of the annual or special meeting of shareholders at which directors of the Company are elected or reelected, as the case may be, regardless of when the option is actually delivered to the director or acknowledged or agreed to by him. (c) The term "subsidiary corporation" as used throughout this Plan shall mean a corporation in which the Company owns, directly or indirectly, shares of stock representing fifty percent or more of the outstanding voting power of all classes of stock of such corporation at the time of the granting of an option under this Plan. (d) The use of the masculine pronoun shall include the feminine gender whenever appropriate. -4- APPENDIX I NON-QUALIFIED STOCK OPTION To: ------------------------------------------------------------------------- Name ------------------------------------------------------------------------- Address Date: ------------------------------- You are hereby granted an option, effective as of the date hereof, to purchase shares of common stock, no par value per share ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company"), at a price of $____________ per share pursuant to the Company's 1996 Stock Option Plan for Non-Employee Directors (the "Plan"). Your option may first be exercised on and after the earlier to occur of (i) one year from the date of its grant or (ii) a "change in control" of the Company, as hereinafter defined, but not before that time. On and after the earlier to occur of (i) one year from the date your option is granted or (ii) a "change in control" of the Company, and prior to ten years from the date of its grant, your option may be exercised in whole, or from time to time in part, for up to the total whole number of shares then subject to the option minus the number of shares previously purchased by exercise of the option (as appropriately adjusted for stock dividends, stock splits and what the Board of Directors of the Company deems in its sole discretion to be similar circumstances). No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after the expiration of ten years from the date of its grant, except if terminated earlier as hereafter provided. For purposes of your option, a "change in control" of the Company shall have been deemed to conclusively occur when any of the following events shall have occurred without your prior written consent: (1) a change in the constituency of the Company's Board of Directors with the result that individuals (the "Incumbent Directors") who are members of the Board on the date the Plan is approved by the Company's shareholders cease for any reason to constitute at least a majority of the Board of Directors, provided that any individual who is elected or appointed to the Board of Directors after shareholder approval of the Plan and whose nomination for election or appointment was unanimously approved by the Incumbent Directors shall be considered an Incumbent Director -5- beginning on the date of his or her election to the Board of Directors. (2) a person or group acting in concert as described in Section 13(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") proposes to hold or acquire beneficial ownership within the meaning of Rule 13(d)(3) promulgated under the Exchange Act of a number of voting shares of the Company which constitutes either (i) more than fifty percent of the shares which voted in the election of directors of the Company at the shareholders' meeting immediately preceding such determination or (ii) more than thirty percent of the Company's outstanding voting shares. The term "proposes to hold or acquire" shall mean when a person or group acting in concert has (A) the right to acquire or merge (whether such right is exercisable immediately or only after the passage of time or upon the receipt of such regulatory approvals as is required by applicable law) pursuant to an agreement, arrangement or understanding (whether or not in writing) or upon the exercise or conversion of rights, exchange rights, warrants or options or otherwise; (B) commenced a tender or exchange offer with respect to the voting shares of the Company or securities convertible or exchangeable into voting shares of the Company; or (C) the right to vote pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that such person or group acting in concert shall not be deemed to have acquired such shares if the agreement, arrangement or understanding to vote such securities arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and is not also then reportable on Schedule 13D under the Exchange Act or any comparable or successor report. For purposes of this provision any person or group existing on the date the Plan is approved by shareholders shall be excluded from the definition of "a person or group acting in concert." You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Board of Directors) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Board of -6- Directors) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which you cease to be a director of the Company or a subsidiary corporation (whether by death, disability, resignation, removal, failure to be reelected or otherwise and regardless of whether the failure to continue as a director was for cause or otherwise), but in no event later than ten years from the date this option is granted. After the date you cease to be a director, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date you ceased to be a director. If you are a director of a subsidiary corporation, your directorship shall be deemed to have terminated on the date such company ceases to be a subsidiary corporation, unless you are also a director of the Company or another subsidiary corporation, or on that date became a director of the Company or another subsidiary corporation. Your directorship shall not be deemed to have terminated if you cease being a director of the Company or a subsidiary corporation but are or concurrently therewith become a director of the Company or another subsidiary corporation. If you die while a director of the Company or a subsidiary corporation, executor or administrator, as the case may be, may, at any time within three months after the date of your death (but in no event later than ten years from the date this option is granted), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your directorship with the Company or a subsidiary corporation is terminated by reason of your becoming disabled, you or your legal guardian or custodian may at any time within three months after the date of such termination (but in no event later than ten years from the date this option is granted), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Board of Directors deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be -7- appropriately adjusted in a manner to be determined in the sole discretion of the Board of Directors. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery may not be consummated without violating a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan is approved by the shareholders; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue; (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Board of Directors) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) your portion of other federal, state and local payroll and other taxes due in connection with the option exercise; or (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. -8- The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. -9- It is the intention of the Company and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. (SEAL) By: -------------------------------- -10- I hereby acknowledge receipt of a copy of the foregoing stock option and, having read it hereby signify my understanding of, and my agreement with, its terms and conditions. - -------------------------------- ------------------------------------ date signature -11- EX-10.23 16 IRREVOCABLE PROXY AGREEMENT Exhibit 10.23 Draft 10/16/96 IRREVOCABLE PROXY AGREEMENT The undersigned, Annette H. Barrist ("Annette"), hereby irrevocably constitutes and appoints Michael J. Barrist ("Michael") as her attorney and proxy, with full power of substitution in the premises, to vote all shares of the outstanding capital stock of NCO Group, Inc, a Pennsylvania corporation ("Company"), which Annette is entitled to vote at any time on or after the date hereof (the "Shares"). Michael shall have the right to vote all of such Shares as Michael, in his sole and absolute discretion, shall determine. Without limiting the foregoing in any manner whatsoever, Michael shall have the power to vote on any matter relating to the Company for which a shareholder vote is required or sought including, but not limited to, the right to vote with respect to any recapitalization, reorganization, merger, consolidation, sale of assets or properties, increases or decreases in capital stock, reduction of stated capital, amendment to the certificate of incorporation or bylaws and election or removal of directors. Michael also is hereby authorized to vote such shares at any meeting, whether annual or special, and also to vote or otherwise act with respect to such shares in connection with any action by consent in lieu of a meeting or any other act which a shareholder may take. In addition to and in furtherance of the powers set forth herein, Annette hereby appoints Michael as her true and lawful attorney-in-fact with full power and authority in her name, place and stead, to do and perform all other acts with respect to the proxy granted above and to exercise or perform any act, power, duty, right, or obligation in connection with, arising from, or relating to such proxy. Michael's power hereunder includes, but is not limited to, the power to waive notice of any meeting, to execute any and all documents in connection with the voting of such Shares, including, but not limited to, any consents, demands, waivers or the giving of proxies, to exercise any and all voting powers which may be exercised by Annette as a shareholder in the Company, and in general, to do all other acts, deeds and matters whatsoever with respect to the voting of the Shares as fully and effectually to all intents and purposes as Annette could do in her own proper person if personally present, giving to said attorney power to make and substitute under his attorney an attorney or attorneys for all the purposes herein described, hereby ratifying and confirming all that the said attorney or substitute or substitutes shall do by virtue hereof; provided, however, that nothing herein shall be deemed to give Michael the power to sell, assign, dispose of, pledge, hypothecate or otherwise transfer the Shares. In addition to the powers and discretion herein specially given and conferred upon said attorney, and notwithstanding any usage or custom to the contrary, Michael shall have the full power, right and authority to do, perform and to cause to be done and performed all such acts, deeds and matters as Michael, in his sole discretion, shall deem reasonable, necessary or proper, to carry out the intent and purposes of this Agreement as fully, effectually and absolutely as if he were the absolute owner and possessor of the Shares. Michael, or any substitute, shall not be liable for any mistake of fact or error of judgment hereunder, or for any acts or omissions of any kind hereunder, unless caused by his own gross negligence or willful misconduct. The proxy and power of attorney conferred hereby is irrevocable to the full extent permitted by law and is coupled with an interest including, without limitation, that defined in Section 1759(d) of the Pennsylvania Business Corporation Law of 1988, as amended. This proxy and power of attorney revokes any other proxy and power of attorney granted by the undersigned at any time with respect to the Shares and shall continue in effect until terminated by the mutual agreement of Annette and Michael. In the event of Annette's death, disability or incompetency, from whatever cause, the proxy and power of attorney conferred hereby shall not thereby be revoked. This Agreement shall be binding on the parties hereto and their heirs, executors, personal representatives, administrators, successors and assign. IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, have executed this Agreement this ______ day of ____________, 1996. ------------------------ Annette H. Barrist ------------------------- Michael J. Barrist COMMONWEALTH OF PENNSYLVANIA : : SS COUNTY OF : Before me, the undersigned, a Notary Public within and for the County of ______________, Commonwealth of Pennsylvania, personally appeared Annette H. Barrist and Michael J. Barrist, known to me to be the persons whose names are subscribed to the within instrument, and acknowledged that they executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal this ________ day of ___________, 1988. ------------------------- EX-10.24 17 EXHIBIT 10.24 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT OF NCO GROUP, INC. ("COMPANY") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED (i) UNTIL (A) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND APPLICABLE STATE SECURITIES LAW OR (B) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH WARRANT (PROVIDED SUCH OTHER COUNSEL IS REASONABLY SATISFACTORY TO THE COMPANY) THAT SUCH WARRANT MAY BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAW. Right to Purchase up to 3,770 Shares of Common Stock of NCO Group, Inc. NCO GROUP, INC. COMMON STOCK PURCHASE WARRANT NCO Group, Inc. a Pennsylvania corporation (the "Company"), hereby certifies that, for value received, Mellon Bank, N.A. ("Bank") is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time upon the occurrence of an Exercise Event before 5:00 p.m., Philadelphia time, on July 31, 2005 up to 3,770 fully paid and nonassessable shares of Common Stock, without par value, of the Company at a purchase price per share of $.01 (such purchase price per share as further adjusted from time to time as herein provided is referred to herein as the "Purchase Price"). The number and character of such shares of Common Stock and the Purchase Price are subject to further adjustment as provided herein. This Common Stock Purchase Warrant (the "Warrant") replaces the Common Stock Purchase Warrant evidencing the right to purchase shares of Common Stock of the Company, issued pursuant to a certain Warrant Agreement (the "Agreement") dated as of July 28, 1995, among the Company and Bank and subject to the Registration Rights Agreement, copies of which agreement are on file at the principal office of the Company, and the holder of this Warrant shall be entitled to all of the benefits of the Agreement and the Registration Rights Agreement, as provided therein. If any term of this Warrant conflicts with any term of the Warrant Agreement, the terms of this Warrant shall be controlling. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Common Stock" includes (i) the Company's Common Stock, without par value, as authorized on the date of the Agreement, (ii) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividend and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (iii) any other securities into which or for which any of the securities described in (i) or (ii) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (b) The term "Company" shall include any corporation which shall succeed or assume the obligations of the Company hereunder. (c) The term "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for additional shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. (d) The term "Current Market Price" shall mean, in respect of any share of Common Stock on any date herein specified, the higher of (a) the appraised value per share of Common Stock as at such date, or if there shall then be a public market for the Common Stock, (b) the average of the daily market prices for 15 consecutive trading days commencing 20 days before such date. The daily market price for each such trading days shall be (i) the closing sale price on such date or, if there is no such sale price, the average of the last reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (ii) if neither such corporation at the time is engaged in the business of reporting such prices, as furnished by a similar firm then engaged in such business, or (iii) if there is no such firm, as furnished by any member of the NASD selected mutually by Bank and the -2- Company or, if they cannot agree upon such selection, as selected by two such members of the NASD, one of which shall be selected by Bank and one of which shall be selected by company. (e) The term "Exercise Event" shall mean any of (i) a Change in Control, (ii) a Qualified Disposition, or (iii) a Qualified IPO (each as defined in the Agreement). (f) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, on the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or other Securities pursuant to Section 3 or otherwise. (g) The term "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. (h) The Term "Registration Rights Agreement" shall mean that certain Amended and Restated Registration Rights Agreement dated as of September 5, 1996 among the Company and Bank. All capitalized terms used herein without specific definition shall have the meanings assigned to such terms in the Agreement. 1. Right to Put Warrants. 1.1 During the twelve-month period ending on July 31, 2001 (the "Put Period"), each of the holders of the Warrants shall have the right to sell to the Company, at the Repurchase Price determined pursuant to Section 2.6 of the Agreement, any or all of the Warrants. 1.2 A holder of Warrants shall give the Company at least thirty (30) days prior written notice (which notice shall be irrevocable, except for an Event of Force Majeure) of its intention to exercise any right of sale (the "Put Notice") and -3- shall specify in such notice the number of Warrants to be sold and may specify in such notice a proposed date of sale. The closing of any repurchase of the Warrants pursuant to this Section 1 shall take place at the offices of the Company at 10:00 A.M. local time on a Business Date (the "Put Closing Date") which shall not be later than the latest to occur of (i) the date specified in the Put Notice and (ii) the date five Business Days after a final determination of the Repurchase Price. On or prior to the Put Closing Date, the Company shall deliver a certified or bank cashier's check to each holder of the Warrants being repurchased, in an amount equal to the Repurchase Price for its pro-rata share of the Warrants being repurchased, or shall transfer such amount by wire transfer of immediately available funds to any account specified in writing by such holder. Bank's rights under Section 1 of this Warrant shall terminate upon the closing of a Qualified IPO (as defined in the Warrant Agreement). 2. Right to Call Warrants. 2.1 During the twelve-month period ending on July 31 2001 (the "Call Period"), the Company shall have the right to repurchase from each of the holders of the Warrants, on a pro-rata basis, at the Repurchase Price determined pursuant to Section 2.6 of the Agreement, any or all of the Warrants. 2.2 The Company shall give each of the holders of the Warrants at least thirty (30) days prior written notice (which notice shall be irrevocable, except for an Event of Force Majeure) of its intention to exercise any right of sale (the "Call Notice") and shall specify in such notice the number of Warrants to be repurchased and may specify in such notice a proposed date of sale. The closing of any repurchase of the Warrants shall take place at the offices of the Company at 10:00 A.M. local time on a Business Date (the "Call Closing Date") which shall not be later than the latest to occur of (i) the date specified in the Call Notice and (ii) the date five Business Days after a final determination of the Repurchase Price. On or prior to the Call Closing Date, the Company shall deliver a certified or bank cashier's check to each holder of the Warrants being repurchased, in an amount equal to the Repurchase Price for its pro-rata share of the Warrants being repurchased, or shall transfer such amount by wire transfer of immediately available funds to any account specified in writing by such holder. -4- The Company's rights under Section 2 of this Warrant shall terminate upon the closing of a Qualified IPO (as defined in the Warrant Agreement). 3. Exercise of Warrant. 3.1 Full Exercise. This Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 3.2 Partial Exercise. This Warrant may be exercised in part (in lots of 1,000 or, if this Warrant is then exercisable for a lesser amount, in such lesser amount) by surrender of this Warrant in the manner and at the place provided in subsection 3.1 except that the amount payable by the holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the holder in the subscription at the end hereof by (b) the Purchase Price then in effect. On any such partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 3.3 Right to Convert Warrant. (a) In addition to and without limiting the right of the holder of this Warrant, such holder shall have the right (the "Conversion Right") to convert this warrant or any portion thereof into shares of Common Stock as provided in this subsection at any time or from time to time prior to its expiration upon the occurrence of an Exercise Event. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (which number and kind of shares for the purposes of this subsection shall mean the shares of Common Stock of the Company and which shares of Common Stock are sometimes referred to in this subsection as the "Converted Warrant Shares"), the Company shall deliver to the registered -5- holder of this Warrant, without payment by such holder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the number obtained by multiplying the number of shares of Common Stock for which the Conversion Right is being exercised at any time by a fraction, (i) the numerator of which shall be a number equal to the difference between (x) the Purchase Price in effect at such time and (y) the Fair Market Value (as defined below) of a single share of Common Stock and (ii) the denominator of which shall be the Fair Market Value of a single share of Common Stock, determined in each case as of the close of business on the Conversion Date (as defined below). No fractional shares shall be issued upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the registered holder of this Warrant an amount in cash equal to the Fair Market Value of the resulting fractional share. (b) The Conversion Right may be exercised by the holder of the Warrant by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that such holder thereby intends to exercise the Conversion Right and indicating the number of shares of Common Stock subject to this Warrant which are being surrendered in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), but not later than the expiration date of this Warrant. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right, together with a check in payment of any fractional share and, in the case of a partial exercise, a new warrant evidencing the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the registered holder of this Warrant within twenty (20) days following the Conversion Date. (c) For purposes of this Warrant, the "Fair Market Value" of a share of Common Stock as of a particular date (the "Valuation Date") shall mean: (i) Current Market Price; (ii) except as provided in (iii) below, if the Company's Common Stock is not quoted as set forth in (i), then as determined in good faith by the -6- Company's Board of Directors upon a review of all relevant factors. If the Company and the holder of the Warrant disagree as to the determination of Fair Market Value, the Company and the holder of the Warrant shall engage an independent, third-party investment banking firm or other appraiser to determine the valuation of the Company. The cost of such valuation shall be borne by the Company; or (iii) If the Valuation Date is the date on which the Company's Common Stock is first sold to the public by the Company in a firm commitment public offering under the Securities Act of 1933, as amended (the "1933 Act"), then the initial public offering price (before deducting commissions, discounts or expenses) at which the Common Stock is sold in such offering. 3.4 Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 3.5 No Rights as Stockholder. This Warrant does not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company prior to its exercise. 4. Delivery of Stock Certificate, etc. on Exercise. As soon as practicable after the exercise of this Warrant in full or in part and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes, but not income taxes of the holder) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash value to such fraction multiplied by the then Current Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 1 or otherwise. -7- 5. Adjustments. The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 5. The Company shall give each holder notice of any event described below which requires an adjustment pursuant to this Section 5 at the time of such event. 5.1 Stock Dividends, Subdivisions and Combinations. If at any time the Company shall: (a) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, additional shares of Common Stock, (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Purchase Price shall be adjusted to equal (A) the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 5.2 Certain Other Distributions. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: (a) any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock), or -8- (b) any warrants or other rights to subscribe for or purchase any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock), the holder shall be entitled to receive such dividends or distributions as if the holder has exercised the Warrant. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 5.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 5.2. 5.3 Issuance of Additional Shares of Common Stock. (a) If at any time the Company shall (except as hereinafter provided) issue or sell any additional shares of Common Stock in exchange for consideration in an amount per additional share of Common Stock less than the Fair Market Value at the time the additional shares of Common Stock are issued, then (i) the Purchase Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be reduced to a price determined by dividing (A) an amount equal to the sum of (x) the number of shares of Common Stock Outstanding immediately prior to such issue or sale multiplied by the then existing Purchase Price, plus (y) the consideration, if any, received by the Company upon such issue or sale, by (B) the total number of shares of Common Stock Outstanding immediately after such issue or sale; and (ii) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the Purchase Price in effect immediately prior to such issue or sale by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale and dividing the product thereof by the Purchase Price resulting from the adjustment made pursuant to clause (i) above. (b) If at any time the Company (except as hereinafter provided) shall issue or sell any additional shares of Common Stock in exchange for consideration in an -9- amount per additional share of Common Stock which is less than the Fair Market Value at the time the additional shares of Common Stock are issued, the adjustment required under this Section 5.3 shall be made in accordance with the formula in paragraph (a) above which results in the lower Purchase Price following such adjustment. The provisions of paragraph (a) of Section 5.3 shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided under Section 5.1 or 5.2. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under paragraph (a) of Section 5.3 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 5.4 or Section 5.3. 5.4 Issuance of Warrants or Other Rights. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving corporation) issue or sell, any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Warrants or other right or upon conversion or exchange of such Convertible Securities shall be less than the Fair Market Value immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 5.3 on the basis that the maximum number of additional shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of the actual issuance of the number of Shares for which this Warrant is exercisable and such warrants or other rights. No further adjustments of the Purchase Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual -10- issue of such Common Stock upon such conversion or exchange of such Convertible Securities. 5.5 Issuance of Convertible Securities. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation) issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value immediately prior to the time of such issue or sale, then the number of Shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 5.3 on the basis that the maximum number of additional shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the number of Shares for which this Warrant is exercisable and the Purchase Price shall be made under this Section 5.5 upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 5.4. No further adjustments of the number of Shares for which this Warrant is exercisable and the Purchase Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the number of Shares for which this Warrant is exercisable and the Purchase Price have been or are to be made pursuant to other provisions of this Section 5, no further adjustments of the number of Shares for which this Warrant is exercisable and the Purchase Price shall be made by reason of such issue or sale. 5.6 Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price shall have been made pursuant to Section 5.4 or Section 5.5 as the result of any issuance of warrants, rights or Convertible Securities, (a) such warrants or rights, or the right of conversion or exchange in such other Convertible Securities, shall expire, and all or a portion of such -11- warrants or rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised, or (b) the consideration per share for which shares of Common Stock are issuable pursuant to such warrants or rights, or the terms of such other Convertible Securities, shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event, then for each outstanding Warrant such previous adjustment shall be rescinded and annulled and the additional shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of (c) treating the number of additional shares of Common Stock or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise of any such warrants or rights or any such right of conversion of exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (d) treating any such warrants or rights or any such other Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such warrants or rights or other Convertible Securities; whereupon a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. 5.7 Other Provisions Applicable to Adjustments Under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price provided for in this Section 5: -12- (a) Computation of Consideration. To the extent that any additional shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the consideration received by Company therefor shall be the amount of the cash received by Company therefor, or, if such additional shares of Common Stock or Convertible Securities are offered by Company for subscription, the subscription price, or, if such additional shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company. In case any additional shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase such additional shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such additional shares of Common Stock, Convertible Securities, warrants or other rights, as the case may be. The consideration for any additional shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by Company for issuing such warrants or other rights plus the additional consideration payable to the Company upon exercise of such warrants or other rights. The consideration for any additional shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be consideration received by Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible -13- Securities, plus the additional consideration, if any, payable to Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any additional shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Company shall be deemed to have received for such additional shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (b) When Adjustments to be Made. The adjustments required by this Section 5 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 5.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than $.0001 of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 5 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (c) Fractional Interests. In computing adjustments under this Section 5, fractional interests in Common Stock shall be taken into account to the nearest 1000th of a share. (d) When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any -14- such adjustment previously made in respect thereof shall be rescinded and annulled. 5.8 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including Warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of the Common Stock of the Company, then each holder shall have the right thereafter, to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by any holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 5. For -15- purposes of this Section 5.8, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 5.8 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. (b) In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the holders of the Warrants after the effective date of such dissolution pursuant to this Section 5 to a bank or trust company, as trustee for the holder or holders of the Warrants. 5.9 Certain Limitations. Notwithstanding anything herein to the contrary, after any and all adjustments required by the provisions of this Section 5 are made, the Purchase Price shall not be less than the par value per share of Common Stock. 6. Record Date as Date of Issue or Sale; Treasury Stock. (a) In the event that at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock or Convertible Securities, or (ii) to subscribe for or purchase Common Stock or Convertible Securities then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) The number of shares of Common Stock outstanding at any given time shall not include shares -16- owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of Section 5. 7. No Dilution or Impairment. The Company will not by an action, including, without limitation, by amending its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants, but will at all times in good faith assist in the carrying out of all such terms and in the taking of such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants against dilution or other impairment, but only as provided herein. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant and (c) will use its best effects to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable Company to perform its obligations under this Warrant. Upon the request of the holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to the holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 8. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock issuable on the exercise of the Warrants, the Company at its expense will compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. If requested by the Holder hereof, the Company will provide an accountant's certificate verifying the accuracy of the adjustments. The Company will forthwith mail a copy of each such certificate of each holder of a Warrant, and will, on the written request at any time of any holder of a Warrant, furnish to such holder a like certificate setting forth the Purchase Price at the time in effect and showing how it was calculated. -17- 9. Notices of Record Date, etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 10 days prior to the date specified in such notice on which any such action is to be taken. Notwithstanding the foregoing, failure to give such notice or any defect in such notice shall not effect the validity or legality of any such transaction. 10. Reservation of Stock, etc. Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock from time to time issuable on the exercise of the Warrants. -18- 11. Exchange of Warrants. On surrender for exchange of any Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant and Warrants of like tenor, calling in the aggregate on the face or faces thereof from the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 13. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) Upon (and not before) the occurrence of an Exercise Event, title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferrable by endorsement and delivery; and (b) subject to (a) above, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title thereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchase, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby. 14. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. -19- 15. Miscellaneous. This Warrant and any term hereof may be changed, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. Any covenant or provision hereof may be omitted or waived with the written consent of the holder or holders of at least fifty percent (50%) of the Common Stock issued and issuable upon exercise of the Warrant. This Warrant shall be construed and enforced in accordance with and governed by the laws of the Commonwealth of Pennsylvania. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This Warrant is being executed as an instrument under sale. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 16. Expiration. The right to exercise this Warrant shall expire at 5:00 p.m., Philadelphia time, July 31, 2005. -20- IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. NCO GROUP, INC. BY: /S/ Michael J. Barrist -------------------------------- Name: Michael J. Barrist Title: President [Corporate Seal) Attest: By: /s/ Joshua Gindin ------------------------ Name: Joshua Gindin Title: Secretary -21- FORM OF SUBSCRIPTION [To be signed only on exercise of Warrant] TO NCO GROUP, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, __________ shares of Common Stock of NCO GROUP, INC. and herewith makes payment of $_________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to ________________, whose address is ______________________, Dated: _____________________________ (Signature must conform to name of holder as specified on the face of the Warrant) _____________________________ (Address) FORM OF ASSIGNMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto _______________________ the right represented by the within Warrant to purchase __________ shares of Common Stock of NCO GROUP, INC. to which the within Warrant relates, and appoints ___________ Attorney to transfer such right on the books of NCO GROUP, INC. with full power of substitution in the premises. Dated: _____________________________ (Signature must conform to name of holder as specified on the face of the Warrant) _____________________________ (Address) -22- EX-10.25 18 EXHIBIT 10.25 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT OF NCO GROUP, INC. ("COMPANY") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED (i) UNTIL (A) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND APPLICABLE STATE SECURITIES LAW OR (B) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH WARRANT (PROVIDED SUCH OTHER COUNSEL IS REASONABLY SATISFACTORY TO THE COMPANY) THAT SUCH WARRANT MAY BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAW. Right to Purchase up to 1,000 Shares of Common Stock of NCO Group, Inc. NCO GROUP, INC. COMMON STOCK PURCHASE WARRANT NCO Group, Inc. a Pennsylvania corporation (the "Company"), hereby certifies that, for value received, Mellon Bank, N.A. ("Bank") is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time upon the occurrence of an Exercise Event before 5:00 p.m., Philadelphia time, on July 31, 2005 up to 1,000 fully paid and nonassessable shares of Common Stock, without par value, of the Company at a purchase price per share equal to either: i) the offering price of the shares of the Company's common stock to be offered in a Qualified IPO to occur on or before December 31, 1996 (after giving effect to any stock split declared in connection with any Qualified IPO) or ii) if the Company does not conduct a Qualified IPO on or before December 31, 1996, then $181.80 (such purchase price per share as further adjusted from time to time as herein provided is referred to herein as the "Purchase Price"). The number and character of such shares of Common Stock and the Purchase Price are subject to further adjustment as provided herein. This Warrant is the Common Stock Purchase Warrant (the "Warrant") evidencing the right to purchase shares of Common Stock of the Company, issued pursuant to a certain Warrant Agreement (the "Agreement") dated as of September 5, 1996, among the Company and Bank and subject to the Registration Rights Agreement, copies of which agreement are on file at the principal office of the Company, and the holder of this Warrant shall be entitled to all of the benefits of the Agreement and the Registration Rights Agreement, as provided therein. If any term of this Warrant conflicts with any term of the Warrant Agreement, the terms of this Warrant shall be controlling. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Common Stock" includes (i) the Company's Common Stock, without par value, as authorized on the date of the Agreement, (ii) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividend and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (iii) any other securities into which or for which any of the securities described in (i) or (ii) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (b) The term "Company" shall include any corporation which shall succeed or assume the obligations of the Company hereunder. (c) The term "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for additional shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. (d) The term "Current Market Price" shall mean, in respect of any share of Common Stock on any date herein specified, the higher of (a) the appraised value per share of Common Stock as at such date, or if there shall then be a public market for the Common Stock, (b) the average of the daily market prices for 15 consecutive trading days commencing 20 days before such date. The daily market price for each such trading days shall be (i) the closing sale price on such date or, if there is no such sale price, the average of the last reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (ii) if neither such corporation at the time -2- is engaged in the business of reporting such prices, as furnished by a similar firm then engaged in such business, or (iii) if there is no such firm, as furnished by any member of the NASD selected mutually by Bank and the Company or, if they cannot agree upon such selection, as selected by two such members of the NASD, one of which shall be selected by Bank and one of which shall be selected by company. (e) The term "Exercise Event" shall mean any of (i) a Change in Control (as defined in the Agreement), (ii) a Qualified Disposition (as defined in the Agreement), or (iii) a Qualified IPO (as defined in the Agreement), except the Qualified IPO to be conducted by the Company on or before December 31, 1996. (f) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, on the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or other Securities pursuant to Section 3 or otherwise. (g) The term "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. (h) The Term "Registration Rights Agreement" shall mean that certain Amended and Restated Registration Rights Agreement dated as of even date herewith among the Company and Bank. All capitalized terms used herein without specific definition shall have the meanings assigned to such terms in the Agreement. 1. Right to Put Warrants. 1.1 During the twelve-month period ending on July 31, 2001 (the "Put Period"), each of the holders of the Warrants shall have the right to sell to the Company, at the -3- Repurchase Price determined pursuant to Section 2.6 of the Agreement, any or all of the Warrants. 1.2 A holder of Warrants shall give the Company at least thirty (30) days prior written notice (which notice shall be irrevocable, except for an Event of Force Majeure) of its intention to exercise any right of sale (the "Put Notice") and shall specify in such notice the number of Warrants to be sold and may specify in such notice a proposed date of sale. The closing of any repurchase of the Warrants pursuant to this Section 1 shall take place at the offices of the Company at 10:00 A.M. local time on a Business Date (the "Put Closing Date") which shall not be later than the latest to occur of (i) the date specified in the Put Notice and (ii) the date five Business Days after a final determination of the Repurchase Price. On or prior to the Put Closing Date, the Company shall deliver a certified or bank cashier's check to each holder of the Warrants being repurchased, in an amount equal to the Repurchase Price for its pro-rata share of the Warrants being repurchased, or shall transfer such amount by wire transfer of immediately available funds to any account specified in writing by such holder. Bank's rights under Section 1 of this Warrant shall terminate upon the closing of a Qualified IPO (as defined in the Warrant Agreement). 2. Right to Call Warrants. 2.1 During the twelve-month period ending on July 31, 2001 (the "Call Period"), the Company shall have the right to repurchase from each of the holders of the Warrants, on a pro-rata basis, at the Repurchase Price determined pursuant to Section 2.6 of the Agreement, any or all of the Warrants. 2.2 The Company shall give each of the holders of the Warrants at least thirty (30) days prior written notice (which notice shall be irrevocable, except for an Event of Force Majeure) of its intention to exercise any right of sale (the "Call Notice") and shall specify in such notice the number of Warrants to be repurchased and may specify in such notice a proposed date of sale. The closing of any repurchase of the Warrants shall take place at the offices of the Company at 10:00 A.M. local time on a Business Date (the "Call Closing Date") which shall not be later than the latest to occur of (i) the date specified in the Call Notice and (ii) the date five Business Days after a final determination of the Repurchase Price. -4- On or prior to the Call Closing Date, the Company shall deliver a certified or bank cashier's check to each holder of the Warrants being repurchased, in an amount equal to the Repurchase Price for its pro-rata share of the Warrants being repurchased, or shall transfer such amount by wire transfer of immediately available funds to any account specified in writing by such holder. The Company's rights under Section 2 of this Warrant shall terminate upon the closing of a Qualified IPO (as defined in the Warrant Agreement). 3. Exercise of Warrant. 3.1 Full Exercise. This Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 3.2 Partial Exercise. This Warrant may be exercised in part (in lots of 1,000 or, if this Warrant is then exercisable for a lesser amount, in such lesser amount) by surrender of this Warrant in the manner and at the place provided in subsection 3.1 except that the amount payable by the holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the holder in the subscription at the end hereof by (b) the Purchase Price then in effect. On any such partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 3.3 Right to Convert Warrant. (a) In addition to and without limiting the right of the holder of this Warrant, such holder shall have the right (the "Conversion Right") to convert this warrant or any portion thereof into shares of Common Stock as provided in this subsection at any time or from time to time prior to its expiration upon the occurrence of an -5- Exercise Event. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (which number and kind of shares for the purposes of this subsection shall mean the shares of Common Stock of the Company and which shares of Common Stock are sometimes referred to in this subsection as the "Converted Warrant Shares"), the Company shall deliver to the registered holder of this Warrant, without payment by such holder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the number obtained by multiplying the number of shares of Common Stock for which the Conversion Right is being exercised at any time by a fraction, (i) the numerator of which shall be a number equal to the difference between (x) the Purchase Price in effect at such time and (y) the Fair Market Value (as defined below) of a single share of Common Stock and (ii) the denominator of which shall be the Fair Market Value of a single share of Common Stock, determined in each case as of the close of business on the Conversion Date (as defined below). No fractional shares shall be issued upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the registered holder of this Warrant an amount in cash equal to the Fair Market Value of the resulting fractional share. (b) The Conversion Right may be exercised by the holder of the Warrant by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that such holder thereby intends to exercise the Conversion Right and indicating the number of shares of Common Stock subject to this Warrant which are being surrendered in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), but not later than the expiration date of this Warrant. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right, together with a check in payment of any fractional share and, in the case of a partial exercise, a new warrant evidencing the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the registered holder of this Warrant within twenty (20) days following the Conversion Date. -6- (c) For purposes of this Warrant, the "Fair Market Value" of a share of Common Stock as of a particular date (the "Valuation Date") shall mean: (i) Current Market Price; (ii) except as provided in (iii) below, if the Company's Common Stock is not quoted as set forth in (i), then as determined in good faith by the Company's Board of Directors upon a review of all relevant factors. If the Company and the holder of the Warrant disagree as to the determination of Fair Market Value, the Company and the holder of the Warrant shall engage an independent, third-party investment banking firm or other appraiser to determine the valuation of the Company. The cost of such valuation shall be borne by the Company; or (iii) If the Valuation Date is the date on which the Company's Common Stock is first sold to the public by the Company in a firm commitment public offering under the Securities Act of 1933, as amended (the "1933 Act"), then the initial public offering price (before deducting commissions, discounts or expenses) at which the Common Stock is sold in such offering. 3.4 Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 3.5 No Rights as Stockholder. This Warrant does not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company prior to its exercise. 4. Delivery of Stock Certificate, etc. on Exercise. As soon as practicable after the exercise of this Warrant in full or in part and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes, but not income taxes of the holder) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the -7- number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash value to such fraction multiplied by the then Current Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 1 or otherwise. 5. Adjustments. The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 5. The Company shall give each holder notice of any event described below which requires an adjustment pursuant to this Section 5 at the time of such event. 5.1 Stock Dividends, Subdivisions and Combinations. If at any time the Company shall: (a) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, additional shares of Common Stock, (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Purchase Price shall be adjusted to equal (A) the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 5.2 Certain Other Distributions. If at any time the Company shall take a record of the holders of its Common -8- Stock for the purpose of entitling them to receive any dividend or other distribution of: (a) any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock), or (b) any warrants or other rights to subscribe for or purchase any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock), the holder shall be entitled to receive such dividends or distributions as if the holder has exercised the Warrant. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 5.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 5.2. 5.3 Issuance of Additional Shares of Common Stock. (a) If at any time the Company shall (except as hereinafter provided) issue or sell any additional shares of Common Stock in exchange for consideration in an amount per additional share of Common Stock less than the Fair Market Value at the time the additional shares of Common Stock are issued, then (i) the Purchase Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be reduced to a price determined by dividing (A) an amount equal to the sum of (x) the number of shares of Common Stock Outstanding immediately prior to such issue or sale multiplied by the then existing Purchase Price, plus (y) the consideration, if any, received by the Company upon such issue or sale, by (B) the total number of shares of Common Stock Outstanding immediately after such issue or sale; and (ii) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the Purchase Price in effect immediately prior to such issue or sale by the number of shares of -9- Common Stock for which this Warrant is exercisable immediately prior to such issue or sale and dividing the product thereof by the Purchase Price resulting from the adjustment made pursuant to clause (i) above. (b) If at any time the Company (except as hereinafter provided) shall issue or sell any additional shares of Common Stock in exchange for consideration in an amount per additional share of Common Stock which is less than the Fair Market Value at the time the additional shares of Common Stock are issued, the adjustment required under this Section 5.3 shall be made in accordance with the formula in paragraph (a) above which results in the lower Purchase Price following such adjustment. The provisions of paragraph (a) of Section 5.3 shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided under Section 5.1 or 5.2. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under paragraph (a) of Section 5.3 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 5.4 or Section 5.3. 5.4 Issuance of Warrants or Other Rights. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving corporation) issue or sell, any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Warrants or other right or upon conversion or exchange of such Convertible Securities shall be less than the Fair Market Value immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 5.3 on the basis that the maximum number of additional shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been -10- issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of the actual issuance of the number of Shares for which this Warrant is exercisable and such warrants or other rights. No further adjustments of the Purchase Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Convertible Securities. 5.5 Issuance of Convertible Securities. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation) issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value immediately prior to the time of such issue or sale, then the number of Shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 5.3 on the basis that the maximum number of additional shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the number of Shares for which this Warrant is exercisable and the Purchase Price shall be made under this Section 5.5 upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 5.4. No further adjustments of the number of Shares for which this Warrant is exercisable and the Purchase Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the number of Shares for which this Warrant is exercisable and the Purchase Price have been or are to be made pursuant to other provisions of this Section 5, no further adjustments of the number of Shares for which this Warrant is exercisable and the Purchase Price shall be made by reason of such issue or sale. 5.6 Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which -11- this Warrant is exercisable and the Purchase Price shall have been made pursuant to Section 5.4 or Section 5.5 as the result of any issuance of warrants, rights or Convertible Securities, (a) such warrants or rights, or the right of conversion or exchange in such other Convertible Securities, shall expire, and all or a portion of such warrants or rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised, or (b) the consideration per share for which shares of Common Stock are issuable pursuant to such warrants or rights, or the terms of such other Convertible Securities, shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event, then for each outstanding Warrant such previous adjustment shall be rescinded and annulled and the additional shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of (c) treating the number of additional shares of Common Stock or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise of any such warrants or rights or any such right of conversion of exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (d) treating any such warrants or rights or any such other Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such warrants or rights or other Convertible Securities; whereupon a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. -12- 5.7 Other Provisions Applicable to Adjustments Under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price provided for in this Section 5: (a) Computation of Consideration. To the extent that any additional shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the consideration received by Company therefor shall be the amount of the cash received by Company therefor, or, if such additional shares of Common Stock or Convertible Securities are offered by Company for subscription, the subscription price, or, if such additional shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company. In case any additional shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase such additional shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such additional shares of Common Stock, Convertible Securities, warrants or other rights, as the case may be. The consideration for any additional shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by Company for issuing such warrants or other rights plus the additional consideration payable to the Company upon exercise of such warrants or other -13- rights. The consideration for any additional shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be consideration received by Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any additional shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Company shall be deemed to have received for such additional shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (b) When Adjustments to be Made. The adjustments required by this Section 5 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 5.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than $.0001 of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 5 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (c) Fractional Interests. In computing adjustments under this Section 5, fractional interests in Common Stock shall be taken into account to the nearest 1000th of a share. (d) When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a -14- dividend or distribution or subscription or purchase rights and shall thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 5.8 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including Warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of the Common Stock of the Company, then each holder shall have the right thereafter, to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by any holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be -15- deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 5. For purposes of this Section 5.8, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 5.8 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. (b) In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the holders of the Warrants after the effective date of such dissolution pursuant to this Section 5 to a bank or trust company, as trustee for the holder or holders of the Warrants. 5.9 Certain Limitations. Notwithstanding anything herein to the contrary, after any and all adjustments required by the provisions of this Section 5 are made, the Purchase Price shall not be less than the par value per share of Common Stock. 6. Record Date as Date of Issue or Sale; Treasury Stock. (a) In the event that at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock or Convertible Securities, or (ii) to subscribe for or purchase Common Stock or Convertible Securities then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the -16- declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of Section 5. 7. No Dilution or Impairment. The Company will not by an action, including, without limitation, by amending its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants, but will at all times in good faith assist in the carrying out of all such terms and in the taking of such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants against dilution or other impairment, but only as provided herein. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant and (c) will use its best effects to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable Company to perform its obligations under this Warrant. Upon the request of the holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to the holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 8. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock issuable on the exercise of the Warrants, the Company at its expense will compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. If requested by the Holder hereof, the Company will provide an accountant's certificate verifying the accuracy of the adjustments. The Company will forthwith mail a copy of each such certificate of each holder of a Warrant, and will, on the -17- written request at any time of any holder of a Warrant, furnish to such holder a like certificate setting forth the Purchase Price at the time in effect and showing how it was calculated. 9. Notices of Record Date, etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any divided or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 10 days prior to the date specified in such notice on which any such action is to be taken. Notwithstanding the foregoing, failure to give such notice or any defect in such notice shall not effect the validity or legality of any such transaction. 10. Reservation of Stock, etc. Issuable on Exercise of Warrants. The Company will at all times reserve and keep -18- available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock from time to time issuable on the exercise of the Warrants. 11. Exchange of Warrants. On surrender for exchange of any Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant and Warrants of like tenor, calling in the aggregate on the face or faces thereof from the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 13. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) Upon (and not before) the occurrence of an Exercise Event, title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferrable by endorsement and delivery; and (b) subject to (a) above, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title thereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchase, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby. 14. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company -19- an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 15. Miscellaneous. This Warrant and any term hereof may be changed, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. Any covenant or provision hereof may be omitted or waived with the written consent of the holder or holders of at least fifty percent (50%) of the Common Stock issued and issuable upon exercise of the Warrant. This Warrant shall be construed and enforced in accordance with and governed by the laws of the Commonwealth of Pennsylvania. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This Warrant is being executed as an instrument under sale. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 16. Expiration. The right to exercise this Warrant shall expire at 5:00 p.m., Philadelphia time, July 31, 2005. -20- IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. NCO GROUP, INC. BY: /S/ Michael J. Barrist -------------------------------- Name: Michael J. Barrist Title: President [Corporate Seal) Attest: By: /s/ Joshua Gindin ------------------------ Name: Joshua Gindin Title: Secretary -21- FORM OF SUBSCRIPTION [To be signed only on exercise of Warrant] TO NCO GROUP, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, __________ shares of Common Stock of NCO GROUP, INC. and herewith makes payment of $_________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to ________________, whose address is ______________________, Dated: _____________________________ (Signature must conform to name of holder as specified on the face of the Warrant) _____________________________ (Address) FORM OF ASSIGNMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto _______________________ the right represented by the within Warrant to purchase __________ shares of Common Stock of NCO GROUP, INC. to which the within Warrant relates, and appoints ___________ Attorney to transfer such right on the books of NCO GROUP, INC. with full power of substitution in the premises. Dated: _____________________________ (Signature must conform to name of holder as specified on the face of the Warrant) _____________________________ (Address) -22- EX-10 19 EXHIBIT 10.26 [LOGO] Mellon Growth Finance 610 West Germantown Pike Suite 200 Plymouth Meeting, PA 19462 September 6, 1998 Mr. Michael J. Barrist NCO Group, Inc. & Subsidiaries 1740 Walton Road Blue Bell, PA 19422-0987 Via Facsimile/(610) 941-7778 RE: NCO Group, Inc. & Subsidiaries ("NCO")/Financing Proposal Dear Mike: Mellon Bank, N.A. (Mellon) is pleased to inform you that it is prepared to commit to the establishment of a $25MM revolving credit. Such commitment is subject to the terms and conditions outlined herein and in the attached Outline of Terms, and to the execution and delivery of documentation satisfactory to Mellon and its counsel. If the offer evidenced by this letter and the attached Outline of Terms is acceptable, please indicate your acceptance by signing and returning the enclosed copy of this letter and the attachments. This commitment will be effective upon receipt of (1) your check for $50,000.00, and (2) the signed letter, by which you accept this commitment and agree to issue to Mellon, on or before November 15, 1996, a warrant to purchase 397.33 (pre-split) shares of NCO common stock as described in the attached Outline of Terms. This offer will expire on September 10, 1996, unless previously accepted in the manner evidenced above. If this offer is accepted but this transaction does not close on or before November 15, 1996, Mellon's commitment will expire. We look forward to concluding this transaction and appreciate the opportunity of presenting this proposal. Very truly yours, /s/ Liz A. Mellace - ----------------------------- Liz A. Mellace Assistant Vice President NCO Group, Inc. & Subsidiaries September 6, 1996 Page 2 AGREED AND ACCEPTED BY: /s/ Michael J. Barrist - -------------------------------------------- NCO Group, Inc. & Subsidiaries September 6, 1996 - ------------------ Date cc: W.M. Means Enclosure MELLON BANK, N.A. NCO GROUP, INC. & SUBSIDIARIES OUTLINE OF TERMS Borrower: NCO Group, Inc. & Subsidiaries (NCO) Loan Facility: $25,000,000 Revolving Line of Credit Purpose: Acquisition financing and working capital. Facility Fee: Closing fee of $100,000. $50,000 upon the acceptance of a commitment, with the remainder at closing. As additional consideration for extending this commitment, NCO shall issue an additional warrant to Mellon to purchase 397.33 (pre-split) shares of NCO common stock at the IPO price. If there is no IPO within 6 months of closing, the shares will be issued at 1.5X the latest (Coopers & Lybrand) valuation. NCO shall also provide Mellon with one Demand Registration for these shares, not to be executed less than 12 months after the company's IPO. The warrant shall be issued to Mellon on the earlier of (i) the closing date, or (ii) if the transaction contemplated by this commitment is not completed, November 15, 1996. All expenses of the registration shall be paid by NCO. Commitment Fee: 3/8% on the unused portion of the Revolver, payable monthly in arrears. Collateral: All borrowings will be secured by (1) a blanket lien on all business assets of NCO (excluding cash held for clients), including but not limited to accounts receivable, inventory, general intangibles, and equipment now owned and hereafter acquired, (2) a stock pledge of NCO subsidiaries, and (3) an assignment of $2MM in keyman life insurance on Michael Barrist {(1) and (2) above shall also apply to acquired properties}. Interest Rate: Mellon Prime rate or 30 day Libor + 250 basis points. Term: Four years. Amortization: Interest only, payable monthly. NCO Group, Inc. & Subsidiaries Proposed Outline of Terms Financial Covenants: Borrowings shall be subject to the following covenants: 1. Interest Coverage, defined as EBIT divided by interest expense, to be maintained at a minimum of 4.0x. This requirement will be tested on a quarterly basis. 2. Total Debt to EBITDA shall not exceed 2.5x. This requirement will be tested on a quarterly basis. (Current quarter EBITDA annualized.) 3. NCO shall maintain a Minimum Net Worth equal to 90% of the post IPO net worth plus 90% of quarterly net income with no credit for losses. This figure will be adjusted for all equity issues. 4. NCO shall maintain a Current Ratio of 0.5 to 1.0 at all times. The bank revolver will be considered a current liability for purposes of this test. Other Conditions: 1. Annual audited financial statements of NCO completed by a Big 6 accounting firm, accompanied by all accountant's management letters within 90 days of the close of NCO's fiscal year end (NCO shall require management letters with all annual audits); NCO's annual budget to be provided within 45 days after the start of each fiscal year. 2. Monthly internal consolidating financial statements of NCO within 30 days of each month end. 3. NCO shall be required to be in compliance with all the appropriate Federal, State and County environmental and other regulations governing the business of NCO, now and in the future. 4. NCO shall provide an accounts receivable aging according to Mellon's request within 30 days of each month end. 5. NCO shall provide an accounts payable aging report according to Mellon's request within 30 days of each month end. 2 NCO Group, Inc. & Subsidiaries Proposed Outline of Terms 6. Capital expenditures (excludes acquisitions) shall not exceed $2,000,000 in any rolling four quarter period; NCO can carry forward a maximum of $750,000 in unspent capital expenditures per rolling four quarter period into future years. All leases, excluding real estate and car leases, shall be assumed to be capital leases for purposes of CAPEX calculations. Purchase money financing is permitted and will count toward the total. 7. NCO shall not materially alter the nature of its business as presently conducted. 8. All closing costs relating to the proposed facility, including but not limited to legal expenses will be borne by NCO, whether or not the transaction closes. Mellon shall obtain competitive bids from 3 approved law firms reasonably acceptable to Mellon and NCO and award the legal work with respect to this transaction to a mutually agreed upon firm. 9. NCO shall submit a quarterly covenant compliance certificate certified by the Chief Financial Officer. 10. NCO shall covenant that it will not incur, create, assume, or permit to exist any additional indebtedness, except as permitted for capital lease purchases in #6 above. 11. NCO shall provide Mellon evidence of insurance on all inventory and equipment of NCO and shall have Mellon named as loss payee. 12. NCO shall have no outstanding loans or advances or pledge any guarantees to third parties, including unconsolidated subsidiaries but not including consolidated subsidiaries, in excess of $50,000 at any point in time. This requirement excludes an outstanding note to the 1710/20, 1730 and 1740 Sentry East Assoc. limited partnerships totaling $250,000. 13. NCO must maintain net trade A/R plus cash at a minimum level of 50% of Mellon debt. 14. Michael Barrist will remain with NCO in his capacity as President/CEO during the term of the Mellon facility unless a replacement is hired that is reasonably satisfactory to Mellon Bank. 15. Acquisitions exceeding $5,000M in any rolling 12 month period, or acquisitions of companies that are not cash flow (EBITDA) positive after recasting for unusual expense items will be subject to Mellon's approval. All acquisitions shall be in the same or similar line of business and show historical and pro forma covenant compliance. Mellon may require third 3 NCO Group, Inc. & subsidiaries Proposed Outline of Terms party verification of due diligence process on acquisitions subject to Mellon's approval. 16. Seller financing must be structured as unsecured, fully and permanently subordinate to Mellon debt in both principal and interest repayments, with no financial covenants; a permanent stand still provision shall apply in the event of a default on Mellon's debt. Current principal and interest payments may be made on seller debt as long as NCO is in full compliance with Mellon agreements. 17. NCO shall cap 30 day Libor at 9.5% for $3million for two years. 18. NCO shall not pay any dividends during the term of the Mellon facility. Conditions of Lending: The credit facility will be available to NCO upon its fulfillment of such conditions as shall be satisfactory to Mellon. Such conditions shall include, without limitation, the following: 1 Deliver to Mellon for its benefit a Security Agreement which shall be satisfactory to Mellon. 2. Mellon shall have received all other documents, instruments and proceedings which it reasonably requests and all such documents, instruments and proceedings shall be satisfactory to Mellon. 3. No adverse change shall occur in the financial condition of NCO as reflected in the financial Statements dated 6/30/96. 4. There shall be no adverse change in the business products or prospects of NCO prior to the loan closing. 5 NCO shall (i) have raised a minimum of $24 million of net proceeds in an IPO, and (ii) have cash after repayment of Mellon outstandings and the company's final S-Corp. distribution of at least $8 million. NCO shall covenant to: 1. Maintain its existence and its franchises and continue in full force and effect all authorizations and approvals required to conduct its business. 2. Pay its taxes and discharge its liabilities, 4 NCO Group, Inc. & Subsidiaries Proposed Outline of Terms 3. Comply with all agreements to which it is party and by which it is bound and comply with all laws and regulations applicable to it. Defaults: All amounts outstanding under the credit facility shall become immediately due and payable if any one or more of the following events or conditions occur: 1. NCO fails to pay interest or principal installment when due or fails to pay any other amount to Mellon when due. 2. NCO fails to perform or comply with any term or condition of the credit facility or the Security Agreement to be delivered to Mellon. 3. NCO fails to pay any other indebtedness for borrowed money when due beyond any applicable grace. 4. NCO voluntarily seeks protection under any bankruptcy or insolvency law or becomes the subject of any involuntary proceedings under any such law. 5. Any change in majority ownership of NCO. Regulatory Requirements: Performance by Mellon of its obligations and commitments hereunder shall be subject to any applicable requirement of the Board of Governors of the Federal Reserve System or any other regulatory authority of competent jurisdiction. Loan Documentation: The terms and conditions specified herein represent the principal terms and conditions which will be incorporated into appropriate loan documentation by such terms and conditions and are not intended to be an exhaustive description of the loan documentation which will contain additional provisions acceptable to NCO and Mellon. 5 NCO Group, Inc. & Subsidiaries Proposed Outline of Terms Fees and Expenses: The reasonable fees and out-of-pocket expenses of special counsel to Mellon incurred without limitation in connection with the preparation hereof and the negotiation, preparation and closing of the loan documentation and credit facility, as well as post closing fees and expenses which may be required due to any future amendments to the loan agreement, shall be for the account of NCO. Agreed and Accepted: NCO Group, Inc. & Subsidiaries BY: /s/ Michael J. Barrist September 6, 1996 --------------------------------------- ------------------- Date --------------------------------------- Title 6 EX-10.27 20 EXHIBIT 10.27 INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is made this _____ day of September, 1996 by and between NCO FINANCIAL SYSTEMS, INC., a Pennsylvania Corporation ("NCO") with a principal place of business at 1740 Walton Road, Blue Bell, Pennsylvania, 19422, MANAGEMENT ADJUSTMENT BUREAU, INC. ("MAB"), a New York corporation and CRAIG COSTANZO ("Costanzo") an individual with an address of 331 Wellingwood, East Amherst, N.Y. 14051. BACKGROUND A. On or about July 18, 1996, NCO executed a certain stock purchase agreement ("Stock Purchase Agreement") with Craig Costanzo pursuant to which NCO agreed to purchase 100% of the stock of MAB. B. On or about August 5, 1994, MAB had executed a certain lease agreement (as amended, hereinafter collectively "Lease Agreement") with THE UNILAND PARTNERSHIP, L.P., a New York Limited Partnership ("Uniland"), pursuant to which MAB leased from Uniland certain real property located in Amherst, New York. In connection with the Lease Agreement, Costanzo executed a certain Guarantee Agreement ("Guarantee") pursuant to which Costanzo agreed to guarantee the obligations of MAB under the Lease Agreement. C. In connection with the Stock Purchase Agreement, Costanzo and NCO agreed to use their best efforts to obtain a release of Costanzo's obligations under the Guarantee. Although under no legal obligation to do so, NCO submitted a certain assignment and assumption of guarantee agreement to Uniland on August 28, 1996, a copy of which is attached hereto as Exhibit "A" and incorporated by reference herein ("Assumption Agreement"). D. Uniland has advised NCO and Costanzo that as of the date of the closing under the Stock Purchase Agreement, it is not in a position to execute the Assumption Agreement. E. NCO assigned certain of its rights and obligations under the Stock Purchase Agreement to NCO of New York, Inc. pursuant to the terms of a certain assignment agreement dated _____________________, 1996. F. Costanzo and NCO are desirous of consummating and closing the Stock Purchase Agreement while agreeing to continue to use their best efforts to obtain Uniland's consent to the terms and conditions contained in the Assumption Agreement. NOW, THEREFORE, with the foregoing background being incorporated by reference, and intending to be legally bound hereby, the parties hereto agree as follows: 1. NCO and Costanzo agree that for a period of 180 days following the execution of this Agreement, they shall continue to use their best efforts to cause Uniland to execute the Assumption Agreement. 2. NCO agrees to pay Costanzo a sum not to exceed Ten Thousand Dollars within ten (10) days of a presentation of 2 invoices for legal fees incurred by Costanzo for estate planning matters. 3. NCO agrees to submit an application for an irrevocable letter of credit in favor of Costanzo in an amount not to exceed $300,000.00 pursuant to the terms of the (i) Application for Standby Letter of Credit and (ii) Letter of Credit Agreement both of which are attached hereto as Exhibit "B" (collectively "Letter of Credit"). 4. During the remaining term of the Lease Agreement, NCO and MAB agree to indemnify and hold Costanzo harmless for all costs, damages, attorneys fees, liabilities and expenses incurred by Costanzo arising out of or relating to any claim made against Costanzo under the Guarantee; provided, however, that Costanzo agrees to look to the Letter of Credit in the first instance to satisfy NCO's and MAB's obligations hereunder. Costanzo acknowledges that NCO's and MAB's obligation hereunder shall be limited solely to any claims made against Costanzo under the Guarantee and shall not include an indemnification of any other claims which may be made against Costanzo by Uniland or any other party. 5. Costanzo acknowledges and agrees that NCO may alter, amend, or modify the Assumption Agreement without the prior written consent of Costanzo; provided, however, that NCO may not modify paragraph 12 of the Assumption Agreement without the express written consent of Costanzo (which consent shall not be unreasonably withheld). 3 6. Costanzo and NCO acknowledge and confirm that the terms of paragraph 1 constitute an agreement to use the parties "best efforts" and shall in no way constitute a legal and binding obligation on either party to take any action with respect to the Assumption Agreement other than to continue to request that Uniland execute the same and to entertain (in NCO's and Costanzo's sole and absolute discretion) any modifications which Uniland may request. 7. NCO agrees that if Uniland fails to release Costanzo from his obligations under the Guarantee prior to the expiration of the Letter of Credit then, NCO shall cause a replacement letter of credit(s) to be issued until the earlier of (i) the date on which Uniland executes the Assumption Agreement or (ii) expiration of the term of the Lease Agreement. If Uniland executes the Assumption Agreement then, Costanzo agrees to return to NCO the original Letter of Credit then outstanding and to execute such other documents as may be necessary to release NCO of its obligations to post the Letter of Credit hereunder. 8. This Agreement constitutes the entire understanding and agreement among the parties with respect to the subject matter hereof. This Agreement shall be governed by the laws of the State of New York. This Agreement shall be binding upon and enure to the benefit of the parties and their respective successors and assigns. No modification of this Agreement shall be effective unless in writing and signed by authorized 4 representatives of the parties. No party has been induced to enter into this Agreement by any fact, representation, or a matter that is not expressly described in this Agreement. 9. This Agreement may be executed in one or more counterpart copies, all of which shall be deemed to constitute a single original instrument. If any term or provision of this Agreement shall be determined by a Court of competent jurisdiction to be unenforceable, such determination shall not effect or impair the enforceability the remaining terms and provisions of this Agreement. Each party to this Agreement has taken all requisite corporate action to execute, deliver, and perform under this Agreement. 10. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHT EITHER OF THEN MAY HAVE BY A TRIAL BY JURY IN RESPECT TO ANY LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENT, OR ACTIONS OF ANY OF THE PARTIES, INCLUDING THE RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES, AGENTS OR ATTORNEYS. THIS PROVISION IS A MATERIAL INDUCEMENT FOR ALL PARTIES TO ENTER INTO THIS AGREEMENT. The parties hereto have executed this Agreement as of the date first set forth above. NCO FINANCIAL SYSTEMS By: _______________________________ Michael J. Barrist, President Attest: ___________________________ Joshua Gindin 5 MANAGEMENT ADJUSTMENT BUREAU, INC. By: _________________________________ Michael J. Barrist Attest: _____________________________ Joshua Gindin _____________________________________ Craig Costanzo EX-23.1 21 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-11745) of our report dated February 16, 1996, except for notes 1,2,3,7 and 13 for which the date is September 30, 1996 on our audits of the financial statements of NCO Group, Inc. as of December 31, 1994 and 1995 and for the three years in the period ended December 31, 1995. We also consent to the inclusion of our report dated August 20, 1996 on our audits of the financial statements of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996 and for the three years in the period ended December 31, 1995 and the six months ended June 30, 1996. We also consent to the reference to our firm under the caption "Experts" and "Selected Financial and Operating Data." /s/ Coopers & Lybrand, L.L.P. - ----------------------------- Coopers & Lybrand, L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania October 16, 1996 EX-23.2 22 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 16, 1996, with respect to the financial statements of the Trans Union Corporation Collections Division included in Amendment No. 1 to the Registration Statement (Form S-1) and related Prospectus of NCO Group, Inc. for the registration of 2,875,000 shares of its common stock. /s/ Ernst & Young LLP ----------------------- Ernst & Young LLP Chicago, Illinois October 17, 1996 EX-99.1 23 CONSENT OF PERSON NAMED AS A DIRECTOR Exhibit 99.1 CONSENT OF PERSON NAMED AS A DIRECTOR The undersigned hereby consents to being named as a person to become a director of NCO Group, Inc. (the "Company") in the Company's Registration Statement on Form S-1, relating to the registration for sale of 2,875,000 shares of the Company's common stock, and in all amendments thereto filed with the Securities and Exchange Commission. /s/ Eric Siegel --------------- Dated: October 16, 1996 EX-99.2 24 CONSENT OF PERSON NAMED AS A DIRECTOR Exhibit 99.2 CONSENT OF PERSON NAMED AS A DIRECTOR The undersigned hereby consents to being named as a person to become a director of NCO Group, Inc. (the "Company") in the Company's Registration Statement on Form S-1, relating to the registration for sale of 2,875,000 shares of the Company's common stock, and in all amendments thereto filed with the Securities and Exchange Commission. /s/ Allen Wise -------------- Dated: October 17, 1996 -----END PRIVACY-ENHANCED MESSAGE-----